Oil price as one of the world's main source of energy, cannot be undermined. The US Dollar rally that was widely expected before the new year too, is now stand in limbo.

Every participant in the global financial market surely feels the uncertainties now. No bearish that are surely bearish, and no bullish that are certainly bullish; it is as if the trend met with an elusive wall where sellers and buyers hesitate to bet bigger. However, sooner or later, it will arrive at its culmination, where people will find out who losts and who wins.

The thing is, there are many uncertain factors in the market that could bring the culmination forward, and one of the key might very well be crude price.

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Cheap Commodities = Recession?

OilPrice.com in its weekly newsletter early last week noted that the root of concern in the market regarding oil prices has a quite solid reason.

According to the oil market news source, Of course, weighing on crude oil prices are concerns about the health of the global economy. Growth is sluggish in most parts of the world. Europe is stagnant, parts of Latin America are in recession, and China is no longer the growth engine that the world has counted on for the past decade. In fact, the markets are increasingly interpreting the collapse in commodity markets as a potential harbinger of a souring economy. In the past, plummeting commodity prices have only been associated with severe recessions (see: Global Financial Crisis 2008-2009).


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Historical Graphs of Brent Spot 1987-now

 

Oil price dilemma is still unresolved till this editorial was written. On Monday, China disclosed that its diesel consumption has dropped in 2015 compared to 2014, increased worries on oil demands. Meanwhile, chief of Saudi Aramco reiterated their commitment to continue investing in new sources of oil production.

For the forex market, directly or not, the deadlock is important to note; particularly for Canadian Dollar that sink deeper as the country's export dependency on oil showed its face. Other comdolls, Aussie and Kiwi, also potentially hit. In the time being, if panic in the global stock market continues, then there is plenty opporunity for the Japanese Yen and Euro, that was seen as safe haven by some, to strengthen.

Nevertheless, it seems that the turmoil intensifies, not only among minor OPEC countries and Russia, but also among investors that consider oil has became overly oversold. Multinational oil companies too, are under the threat of lowered credit rating if cheap oil period continues. In other word, there is strong expectation in the market for the current rebound to go on. But the fact is, up till this point, no consensus has been reached.

 

The Connected Weakness

Oil price as one of the world's main source of energy, cannot be undermined. Some people think that the cheaper the oil, the better it is because then input prices will be cheaper, along with goods and services when they arrive at the hand of consumers. But it is not true. As is every other thing in the economy, oil prices should stand in a certain equilibrium which is not too high nor too low. When the balance is not realized, then it will continue to sway indefinitely.

In fact, cheap oil price is the one behind Fed FOMC's dovish statement after its meeting in January. FOMC wrote that they are still expecting inflation to reach the targeted 2 percent in mid-term, but no longer uses the term confident. In the short term, they don't even bother to say so; instead mentioning how short-term inflation will stay low due to continuous drop of energy prices. The Committee also no longer confident of the prospect of growth in the country, because low inflation and unrest abroad will probably influence US economy. In fact, it was suspected as the reason behind US GDP's decrease for the fourth quarter of 2015 from 2.1 to 1.8.

Aside of it, if low inflation persist and growth slumps, then FOMC will not have sufficient support to hike rates again in the upcoming meeting at March. If so, we can say that Dollar is losing its drive. In a limited scope, it means that there are additional base for Euro and Yen to strengthen. But for the market in general, this is bad news. The ghost of Fed rate uncertainties that haunted the market last year is back. The US Dollar rally that was widely expected before the new year too, is now stand in limbo.