Monday, November 3, 2014

Oil and Gold Headed Lower in 2015

The recent drop in crude oil prices caught most of us by surprise. Many global forces affect the price of crude oil, but the primary factor lowering oil prices in the U.S. is the strong dollar. Crude oil will likely stay above $75/barrel over the winter as Americans turn on their furnaces, then weaken again in February or March when the ECB starts printing money to stimulate inflation.

The strong dollar and lower oil prices got me thinking about 1981-1985 when the dollar strengthened swiftly. Here is a chart of the dollar index:

Crude oil fell significantly during that period (crude oil adjusted for inflation):

This chart shows the long-term movements of the dollar, oil, and gold.
A stronger dollar in 2015-2016 will mean lower oil prices, which will translate to oil companies losing money under a certain price threshold, much like the natural gas and coal companies have been losing money since 2012. Good for the U.S. economy, but bad for oil companies who do not have a substantial refinery division. American oil companies wisely have been announcing capital expenditure reductions, which means they are not drilling new wells.

Today Bloomberg published a very useful chart of threshold barrel costs: