After a volatile day, crude and heating oil ended down on Thursday. (image: ft.com)

The dollar continued to rally against the euro, which is beset by debt problems in several nations along the EU’s southern periphery. Greece’s troubles have captured most of the headlines, but today it was Portugal’s announcement that it would impose austerity measures that weakened the euro. A strong dollar tends to decrease the prices of commodities since it makes products like crude oil and heating oil, which are priced in dollars, more expensive for traders who hold other currencies. In addition to weakening Europe’s currency, Portugal’s efforts to reduce its deficits could be a sign of an emerging European pattern that, while reducing debt, could also restrict Europe’s economic growth and keep fuel demand low.

Today’s closing prices on the NYMEX

Crude oil (June 2010 contract): Down 1.7 percent, $74.39 per barrel.
Heating oil (June 2010 contract): Down 1.3 percent.

Heating oil prices this week are closely tied to the IMF and its potential involvement in bailing out Greece’s economy. (image: matanews.com)

Last week brought major increases in heating oil prices early on, but falling prices offset those gains on Thursday and Friday. The same factors that brought down prices late last week will likely do the same early this week: Greece’s financial crisis continues to put a drag on the euro, which will continue to drive up the value of the US dollar. As the value of the dollar increases, oil becomes a less attractive investment to foreign traders, usually leading to lower crude and heating oil prices.

The next development in Greece’s fiscal drama will be the meeting of EU ministers on Thursday and Friday. Ministers will discuss, among other things, how best to rescue the Greek economy. If a plan involving only EU support is hammered out, the euro will likely strengthen and bring higher oil prices. If the rescue plan requires assistance from the International Monetary Fund (IMF), the value of the euro will continue to drop, taking oil prices down with it.

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The Greece debt crisis lowered the value of the euro, thus increasing the dollar's value and lowering the price of oil. (image: marketoracle.co.uk and Nicholas Whitaker via heatingoil.com)

Greece’s budget crisis reemerged as a major factor in the oil markets on Friday, and crude and heating oil prices slumped as Greece’s troubles undermined confidence in the euro. The weak euro lifted the value of the dollar, which made dollar-priced commodities (like crude oil and heating oil futures) more expensive for traders holding other currencies, dampening demand. Greece will likely remain in the spotlight at least until Thursday, when EU leaders will meet to discuss what Europe can do to assist Greece. India was also on the minds of oil traders on Friday; India raised interest rates, which could slow down economic growth and growing oil demand in that nation.

Today’s average retail heating oil price in the Northeast is 4 cents lower than Friday’s average price.

Along with other factors, the euro's plunge following Greece's escalating debt situation has indirectly lowered oil prices. (image: www.europeanbusiness.gr and Nicholas Whitaker via heatingoil.com)

A strong dollar pushed down the crude and heating oil prices on Thursday. The euro fell against the dollar on news that Greece, whose deficit crisis has battered the euro over the past month, may have to turn to the International Monetary Fund for a bailout. As the dollar gets stronger, commodities that are priced in dollars (like crude oil and heating oil) become more expensive for traders who hold other currencies, which lowers demand and prices. Weekly inventory reports and OPEC’s meeting on Wednesday generated conflicting interpretations, leaving the value of the dollar to lead oil prices.

Today’s average retail heating oil price in the Northeast is 2 cents lower than Thursday’s average price.

(image: welt.de and zimbio.com)

Caution reigned in oil markets on Monday, as traders played it safe ahead of announcements to come this week from the Federal Reserve and OPEC. Any word from the Fed on interest rates will move the dollar, and commodities prices tend to move inversely to changes in the dollar. OPEC is widely expected to maintain its production quotas, but since its members are producing more oil than allowed by quotas, markets will pay close attention to any statements regarding OPEC members’ compliance with quotas. An emphasis on compliance could shrink global oil supplies and lift prices, but if OPEC is content with compliance then that could be seen as giving a free pass to OPEC nations to boost production. The Fed meets today and OPEC meets on Wednesday, which could create a volatile two days for crude and heating oil prices.

Today’s average retail heating oil price in the Northeast is 3 cents lower than Monday’s average price.

Germanico Pinto, Ecuador’s minister of natural non-renewable resources and current president of OPEC, has called for reduced oil speculation in pursuit of less volatile prices. (image: laht.com)

Bloomberg reported on Wednesday that another high-profile international figure has pledged to fight excessive oil speculation, which many believe contributes to volatile prices. OPEC President Germanico Pinto of Ecuador laid out what he sees as the negative impact of volatile prices on OPEC and the oil industry: “volatility produces difficulties in the markets and in defining a long-term strategy for public investment in the oil industry.”

When making long-term plans for oil exploration projects, oil companies rely on a projected crude price to predict future revenues and budget projects accordingly. Unpredictable prices can place such projects in a state of limbo, adding to uncertainty about future supply levels. Furthermore, as Pinto noted, the inability to predict the profitability of oil companies makes them less attractive to public investors.

Pinto’s statement represents a cause in which the interests of oil companies and consumers are aligned. Just as huge oil companies need steady prices to plan their budgets, so too do American consumers of heating oil and gasoline. But while the OPEC president’s dedication to reducing oil speculation and price volatility may draw additional attention to that goal, he wields little if any power to push toward it. His public statement gives additional industry support to the CFTC’s push to curb speculation on US commodities markets, but his position as the head of an international business organization affords him no official influence over national or international policy.

So the battle for tighter controls over commodities speculation in pursuit of steadier oil prices has a new and vocal ally. Whether heating oil users and gasoline buyers in the US will see any benefit in the near future is still unclear, but they can take some comfort in knowing that, at the very least, when OPEC talks, the world listens.