Oil plunges below $47 on rising dollar, investor jitters

In the post-leveraging bubble era, the price of oil has basically moved lock-step with U.S. stock market sentiment and the outlook for the U.S. economy: rising when sentiment favors the bulls, falling when the bears regain the upper hand.

But that's not to say that factors outside economic sentiment haven't affected oil, chief among these being the dollar. A rising dollar helped send oil well below the psychologically-significant $50 level early Monday, down -$3.46 to $46.87 per barrel.

Dollar's rise eases energy prices

The dollar strengthened 1.1 cents to $1.2944 versus the euro Monday on concern that a rift in the European Central Bank is deepening and may hurt or forestall ECB efforts to stimulate the euro-zone's economy, Reuters reported Monday. Since oil is priced in dollars, oil tends to fall when the dollar rises by a significant amount, and vice-versa.

Contributing to the current slide is basic supply and demand. United Arab Emirates Oil Minister Mohamed al-Hamli told Reuters at an energy conference in Dubai that rising inventories due to the recession continue to put pressure on oil's price.

"A lot of refineries are not running at full capacity. A lot of oil is going into storage," he said. "We've seen that stocks are building up. We've seen them go from 52 days to close to 59 days."

IMF report eyed

Oil has fallen more than $100 since hitting a record-high $147.27 per barrel during the leveraging boom. The price had rallied more than 50 percent after touching lows near $32 late December 2008, but Energy Trader Paul Schmidt told DailyFinance Monday he's bearish short-term, and is eying an upcoming economic forecast by the International Monetary Fund.

"The IMF is one of those bellwether reports that the energy markets look to for oil demand guidance and if they cut their global GDP forecast or, say, the global recovery won't start under early 2010, that will be bearish for oil," Schmidt said. Schmidt added that he was currently short on oil trades with a monthly contract. The IMF is expected to release its revised global economic outlook in the coming week.

With the above in mind, Schmidt said he now expects oil to trade in a $45-55 range through Q2. "We're at a point now in the energy markets and concerning GDP growth where there's a balance of evidence for both a bullish case and a bearish case," Schmidt said. "That's a circumstance that usually leads to range trading until one side amasses enough evidence to overwhelm the other, and that's where we are right now."

The other major energy commodities also fell on Monday's bearish sentiment. Unleaded gasoline fell 4 cents to $1.45 cents per gallon, heating oil declined 5 cents to $1.38 per gallon and natural gas dropped 7 cents to $3.65 per million BTUs.

Oil Analysis: Oil's price drop is bad news for investors in integrated oil companies, but some refiners may benefit. Further, it's also obviously good news for U.S. motorists and the economy. The declines will serve as a de facto tax cut for American motorists. Each $1-per-barrel drop in oil increases U.S. GDP by $100 billion per year and every 1 cent decline in gasoline increases U.S. consumer disposable income by $600 million per year.

That said, neither investors nor motorists should cheer a price collapse below $40 per barrel. Veteran oil analyst Matt Simmons, founder of Simmons & Co., says a too-low oil price will take oil fields out of production and put the brakes on exploration. When the price normalizes again, companies operating reduced-production fields will then have trouble ramping back up, due to the credit crunch, resulting in production increase delays. That scenario would set the stage for the next oil price spike, once oil demand growth resumes along with the recovery in the global economy.
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