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Why oil prices move up and down so much

Dan Weissmann Feb 26, 2015

Why oil prices move up and down so much

Dan Weissmann Feb 26, 2015

On Wednesday, the U.S. Energy Information Administration reported that oil inventories are at historic highs — we’re running out of places to put the stuff. So, why, did oil prices… rise? And then, why did they fall again the next day?

A lot of factors can move the price of oil day to day, and they may or may not have anything to do with where the market is heading long term. 

For instance, traders were not surprised when U.S. crude inventories hit a new high. And that is why prices went up, says Walter Zimmerman, chief technical analyst for United-ICAP.

“There’s an old proverb,” Zimmerman says. “What everybody knows, is already in the price.”

In other words, Wednesday’s opening price of oil already included a discount for the over-supply that everybody expected to see. So, when the news became official, prices didn’t crash. 

And that says Zimmerman, spooked some traders, who thought, “Hey wait, bad news came, why aren’t prices crashing?” They worried they’d bet too low — and bid up prices a bit.

“This happens quite frequently,” he says. “It’s a feature of the landscape of oil trading.”

He thinks Thursday’s dip was a correction — but there’s always another theory.

And sometimes it’s counter-intuitive,” says Phil Flynn, senior market analyst with Price Futures Group. “Today, oil is down because the U.S. economy’s good!”

Here’s what Flynn means:

1. Good news about the U.S. economy makes for a stronger U.S. dollar.

2. Oil priced in dollars is more expensive for countries buying in, say, Euros.

3. Globally, that would mean weaker demand…  and lower prices.

There are facts that shape oil markets over time, but trying to figure out which ones are the most important is really, really hard.  

“At the end of the day, it’s supply and demand, but what goes into supply and demand just boggles the mind,” says Flynn. “It’s the story of the global economy. How’s the global economy going to do?”

As someone once said: “It’s hard to make predictions. Especially about the future.”

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