It’s hard to believe that oil prices are still stuck in the doldrums of an extended bearish outlook, given the news out of China. The central bank cut interest rates and announced a series of measures aimed at preventing currency depreciation. In the process, the Chinese economy continues to suffer and economic activity appears to be slowing, despite the measures.
In spite of the negative economic impacts that a drop in oil production can have on the world economy, most investors and analysts continue to ignore the impact on oil prices. A sustained rise in oil prices could wreak havoc on global economic activity. Given the fact that the global demand for oil is expected to remain high for the foreseeable future, it seems unlikely that oil will become a significant factor in the current global economic and political environment.
To the contrary, if oil prices remain at their current levels, it would indicate that major economic indicators are still pointing towards a healthy recovery in the global economy. Given that the Chinese economy has shown signs of recovery, oil prices are likely to increase. As a result, global economic growth will take a hit and the US dollar will strengthen against other currencies. These economic concerns will cause the US Federal Reserve to tighten policy more frequently and push the country into recession.
In contrast, if oil prices rise, this will cause oil to fall sharply in cost and will create an opportunity for investors to take advantage and profit from falling prices. If the current economic outlook holds true, then the future economic outlook will also be adversely affected, leading investors to take a look at the potential profit opportunities.
In order to understand how the oil price may affect the US economy, investors must first understand why there is such a widespread concern in the media about the effect of low oil prices on the US economy. There are many factors that can affect the supply and demand for oil, but analysts tend to focus on the one thing – the declining demand from China.
China is the largest consumer of oil in the world and has been for several decades. This means that if China suffers a major supply disruption, prices in the US will follow suit. With oil prices expected to decline, China will likely experience a serious economic slowdown and a loss of competitiveness in international markets.
However, China is not the only source for oil. The Middle East countries such as Iran, Venezuela, India, Saudi Arabia and Kuwait will all try to secure their share of the oil market in order to meet growing demand. Although oil prices are expected to rise, the US dollar will stay strong because the US dollar is still considered to be the “the world’s reserve currency”.
As economic indicators continue to point to a steady recovery in the US economy, investors should look at the possibility of making a big profit from the downturn in the current economic conditions by investing in the market. As the price of oil increases, investors will be able to capture a lot of potential profits by increasing their purchase of oil at lower prices.
However, there is a major caveat when investors start looking at the oil prices and how they may affect the US economy. In fact, when the price of oil rises above $100 per barrel, many analysts predict that the US economy will begin to falter because the supply constraint that was preventing the price rise in the past will become weaker. In other words, prices will go back up so investors will have to once again turn to using alternative sources of energy in order to meet their needs.
Although it would seem obvious that oil prices have a major impact on the economy, this doesn’t mean that the investors should blindly jump into investing in oil. There is still a large potential for huge profits by turning a blind eye to this sector and focusing on other segments of the global economy that may experience a downturn or even a recession.
Fundamental analysis is a key element in any investing strategy and should be treated as such. Even if you are hoping to make a big profit, it would be better to wait until the economy stabilizes before investing in oil and then take advantage of the opportunity by focusing on other sectors that could see substantial change.