Oil Prices Fall To Lowest Level In Four Months

An article published Saturday in the International Business Times points out two important links in the oil trading business: the link between a US credit downgrade or debt default and the value of the US dollar, and the link between the value of the US dollar and the price of a barrel of oil.

“A downgrade of the U.S. government’s credit rating – let alone a market- and economy-jarring debt default – would likely lead to a weaker dollar,” it says.

“Oil, priced in dollars, tends to move higher as the U.S. dollar falls, and vice-versa. It’s a result of oil traders trying to maintain their ‘purchasing power’ in the event of a weaker dollar.”

So it stands to reason that a US failure to raise the debt ceiling and at least forestall default on US government debt for another year could lead to an oil price spike.

“How low could the dollar go? Different stress tests real different weaker-dollar scenarios. What’s important is that a 10% decline in the dollar would probably push oil above $120.”

“If Brent oil ventures toward $120, then $130, with gasoline trending toward $4.00 per gallon, oil enters the danger zone – compelling wide-spread consumer and commercial cutbacks.”