Does a Destabilized Dollar Improve Oil Company Stock Possibilities?
Thursday, January 20th, 2011It would appear that the jury is out right now on whether the gradual but intentional weakening of the American dollar will continue or reverse oil prices and the resulting stock value of oil companies. Traditionally, a devalued dollar has driven oil prices and commodities higher with stock appreciation rising in a similar manner. Unfortunately, with so many current variables at play, seeing a clear forecast is tricky, if at all possible.
From 2001 to 2008, when the dollar fell to its lowest, the 73 range, oil-exporting businesses profited by challenging higher prices per barrel to ensure that they could have the funds for their operating expenses in other currencies. Internationally, investors began to take protective measures by shifting some of their portfolio into commodity futures, which developed a temporary jump in value there. During that time, not just oil businesses, but banks and energy organizations also profited from the weakened dollar. ExxonMobil stock soared from $36 – $85, a 138% appreciation and similar to the percentage improve of crude oil per barrel. Are we set for a repeat? Maybe, or maybe not.
Absolutely, the lack of commitment from the G-20 conference recently all but gave agreement for the Federal Reserve to exercise quantitative easing. With no effective measures to require accountability, plans are moving ahead to begin round 2 of asset buying as early as the beginning of November in yet another effort to push interest rates down again and jump begin the sluggish economy. Until that occurs, the surprising, small but encouraging, increase in existing home sales in September could have blunted the effects of the disappointing G-20 conclave.
If, in fact, the dollar is allowed to slide further than the 10% it has against the euro in the last 3 months or to the 15 year low against the Japanese yen, it is expected that not only oil prices and commodities, including gold, will rise but so will stock in participating oil companies. Stock brokers and online traders will be watching these opportunities closely for a chance to gain some possible turn-over advantage or as a portfolio hedge against other investments.
If an all-out currency war can be eliminated, those companies with significant foreign product lines stand to make excellent cash and represent profitable stock market investment prospective. A cheaper American dollar means other currencies can purchase additional and sales will boost. In countries not pegged to dollar currency, oil will remain somewhat cheap. In America, due to the fact we are limited to the American dollar as our only currency, high oil costs may well trigger other responses like less foreign travel, more demand for gasoline at property, and extra healthy competition between foreign imports and domestic products.
For the stock market, dollar devaluation may well be a win-win situation for oil organizations, at least within the short term. Increased sales at higher costs sounds a great deal like the definition of profitability. As a weakened dollar creates far more buying potential, countries for example Germany and France is going to be able to buy much more oil at cheaper rates, energizing the age-old supply and demand model. Conversely, a stronger, more healthy American dollar would help to make crude oil additional high-priced for other weaker currencies, decreasing the demand for oil and forcing lowered prices.
Selecting to invest in foreign commodities and oil companies based solely on the perceived strength or weakness of the dollar alone may well be risky. Having said that, for those willing to place themselves in position just before the Fed moves in November, this might be an exciting and potentially profitable opportunity. Fagio D. Rather
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