Last Thursday the price of Benchmark West Texas Intermediate (WTI) crude oil for June delivery dropped to $99.80 USD per barrel. That was the first time below $100 USD since March 16. During this recent six week period above $100 USD, the price had steadily escalated to $113.39 at the end of April. Oil is used for most transportation and just about all international shipping, since it utilizes ships and airplanes. It is also used in many production processes.

Oil prices rises can be a one two punch to businesses. First, business costs rise through transportation and many productions of goods. Then, the consumer of your goods has to pay more for transportation and goods. This second punch leaves the consumer with less money to purchase your goods and or services. Since 2005 WTI has primarily stayed above $40 USD per barrel. It briefly dropped to $30 USD in 2008 during the Global Financial Crisis.

Looking at this historical chart going back to 1986 shows that WTI stayed in a narrow range of $12 USD to $20 USD primarily from 1986 to 1999 except for one brief flare up in 1990 just before the Gulf War in Kuwait. From the end of 1999 to 2004 WTI steadily floated between $20 USD and $40 USD except for briefly dropping after 9/11 in 2001. After 2004 WTI has steadily been on a march upwards, fluctuating and rising more than ever in the last 20 plus years.

Oil prices are affected by many issues around the world. Supply and demand were the main long term drivers for many years. Unrest and political issues act more like a tax, only existing as long as the unrest tampers with oil supplies. In recent years the USD has fluctuated wildly. The USD weakened against major currencies from 2005 to 2008 while WTI raced to $145.16 USD per barrel on July 14, 2008 and then strengthened while WTI dropped very quickly to $30.28 USD per barrel on December 23, 2008. The recent rise in WTI also corresponded with a weakening dollar and the drop in WTI last week coincided with an increase of the USD value against major currencies. This relatively new linkage of the USD and WTI is because investors are moving their USD to oil when the dollar is weakening to protect their investment value. Then investors are moving it back to the USD when the dollar strengthens, thus weakening WTI.

For many years WTI was stable and that was great for business because it removed uncertainty from a major input of costs. Demand has increased mightily with the development of China and India in recent years. At the same time supply has remained pretty steady. So, an increase in WTI makes sense. For about a year before the recent run up WTI stayed in a range of about $70 to $80 USD per barrel. It looks like that may be the true supply and demand range. You should look at unrest in oil producing countries and which way the USD is moving to gage oil related costs above this range.

M.F.

Sources used:

http://www.exchange-rates.org/history/USD/EUR/T

http://www.eia.doe.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RWTC&f=D