The price of crude oil has fallen in recent months. As a result, gasoline prices have followed suit, giving a welcome relief to travelers and just in time for the summer vacation season. What’s behind this recent move?
Commodity prices are driven by two major factors: the value of the dollar and supply/demand dynamics. The recent drop is no different. In fact, the correlation between the dollar and the price of oil is -0.74, indicating a strong negative relationship. As the dollar has been strengthening lately, oil prices have relaxed.
Why is the dollar strengthening you may ask? After the Troubled Asset Relief Program, the Federal Reserve embarked on a second round of quantitative easing in an effort to foster inflation and quash deflation by making money more available and cheaper, with the hope that consumers and businesses would borrow. However, these two important groups remained cautious in their spending, and the bulk of this stimulus still sits at the Federal Reserve banks.
Then, the Fed began Operation Twist. In short, the Fed sold short-term government securities and bought longer-term issues. This action put downward pressure on long-term interest rates, which made it cheaper for the government and homeowners to borrow.