Crude Oil and Prices

Newspaper and news channels has been boggling about oil prices and market fluctuations with economic growth. The crude oil has immense influence over the economic parameters and key measures that determine the changes in the economy. Crude oil is the base material for fuels that aids from locomotion to power supply. For various high demand consumer products crude oil derivatives has been the main ingredient.

Studies were conducted which did not yield any meaningful results that crude affect the market. One direct approach to crude oil causation is, the operating expenses tend to increase due to more spending on transportation and indirect expenses like employee travel allowance, third party fleet charges etc. This reduces corporate earnings. The reverse should be true.

Gasoline and diesel being the major fuel consumption among the citizens, oil price plunge will reduce spending on oil and more cash is left to consume other products. This way 1 loaf of bread can become 1.5 loaf or an extra kg of rice or an extra liter of petrol.

Lower prices of oil can decrease costs incurred by the manufacturing sector, they use the sub components of crude for lubrication, cooling agents and cleaning agents. On the other hand businesses that run at various stages of crude product production, they will be the one to get affected the most. One way of thinking is advantageous for refineries and bunk holders, petrol and diesel come under inelastic goods, the quantity of consumption never changes on price fluctuations, that push consumption oil producers to extreme profit zone. Decrease in prices would put them under normal profits. Any additional cost is passed on to customers, eventually companies being the fortune getters.

One other thing is high crude prices pull money out of the wallet and the spending on discretionary goods are reduced, this regulates money circulation and less core inflation. The market performs better in medium inflationary situations, this can contribute to a correlation but not much.

The price of oil might head north in an economic expansion, since an economic expansion promotes production, oil prices get to normal subduing the demand. The government starts to deepen the pocket by increasing taxes, so as to benefit from the economic boom.

In other words, the economy is too complex to expect one commodity to drive all business activity in a predictable way.

The indirect cost effect can be witnessed when businesses are built depending on transportation. E-commerce, food deliverers, government road fleet services, etc do get impacted due to increase in price.

Delivery models and supply chain may charge more due to changes in petrol prices and the crude price. Due to the state taxes every region price is set accordingly and the profit margins vary. Zomato, Amazon, Flipkart, makes people never step out by delivering at the doorstep for affordable costs. The losses zoom or profit margins shrink as the crude price soar.

The oil cartel has long been in agreement to function together to maximize profits and also have a rosey policy that countries are willing to accept for oil imports.

Crude and Dollar relationship:

Crude dealers all over the country trade in dollars even if domiciled in Europe. The barrel is currently trading at $45 a barrel and all the countries allocate funds in dollars according to their domestic demand. Suddenly, the dollar appreciates by 5%, the other countries are worried, because the previous allocation is now amounting to $43. The value appreciation doesn’t bother the American, they buy for the same price as quoted before. Currently, no buyers of crude in the world and for time being partial demand has been satisfied. The Crude Cartel is forced to reduce prices (to $43) for the countries to trade with them and this is when crude oil price will decrease making prices affordable. Nothing has changed, except the dollar appreciation, every country is supplied sufficiently for the ask price and the domestic prices are not affected.

Crude and Gold relationship:

There isn’t much to say about the relation between them, crude oil and gold have seen fit to move together. As they are commodities, the way of being an inflation hedge, negative correlation with other asset classes, forex trades, reacting to market crashes and other economic changes be the same for both and for all valuable commodities.

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