Why Higher Oil Is Hurting Emerging Markets So Much (USO)

From John Rubino: Oil prices are up over the past year, which is bad if you’re, say, a developing country that imports a lot of the stuff.

But the US dollar (aka the petrodollar) is also up, which compounds the problem because oil is priced in dollars. So Brazil, for instance, finds itself buying an appreciating necessity that’s priced in an appreciating currency. The result is serious trouble for at least some countries in that position. From Saturday’s Wall Street Journal:

Steep Oil and Strong Dollar Make Toxic Brew for Global Economies

‘Brutal’ rally in dollar-priced crude hammers governments, strains consumers from U.K. to Brazil.

For Americans, rising oil prices are threatening $3-a-gallon gasoline and pushing up prices for plane tickets. In many other parts of the world, today’s crude rally is more painful–sparking protests, gas lines and emergency subsidies to quell unrest.

That is because many consumers outside the U.S. face a double whammy when–like now–the dollar gets stronger at the same time that oil prices rise. While petroleum is produced all over the globe, when it is sold to refiners and other buyers it is almost always priced in dollars.

To sum up the dynamic: Rising oil prices lead to disruptions which force the local government to increase fuel subsidies, which weakens the local currency versus the dollar, which raises oil prices further, which causes disruptions, and so on, until the country turns into Argentina.

So if you’re tracking the “crises move from the periphery to the core” thesis, one good guide is the flow of oil. If a country is a big net importer of oil and both the price of oil and the petrodollar exchange rate are rising, it might be the next domino to fall.

The United States Oil Fund LP ETF (USO) rose $0.02 (+0.15%) in premarket trading Monday. Year-to-date, USO has gained 8.66%, versus a 4.26% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #35 of 116 ETFs in the Commodity ETFs category.


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