Oil prices have been rising lately, going up as much as 2% higher for both the Brent Crude and West Texas Intermediate benchmarks in the early session of the day on Monday, May 9th. This development is important to watch as oil prices often point to higher gold prices. The relationship between the two commodities is especially relevant when the prices in oil move sharply as they have lately. Consider the factors that are driving oil prices higher now before we look at the connection between the oil and gold.
Canadian Wildfires Driving Oil Prices Higher
One of the main factors impacting oil prices presently is the Canadian wildfires in Alberta Province. Alberta’s oil reserves turn out to be the third largest in the entire world after Russian and Venezuelan proven holdings. These fires have raged out of control around Ft. McMurray, the heart of Alberta’s oil sands producing area. The majority of the oil sands projects are located to the north of the community, while the worst part of the fire has so far been raging to the south. This has not stopped these fires from significantly impacting the oil sands production in this lucrative oil region. At more than 2 1/2 million barrels of oil production per day, these sands represent a substantial portion of the entire Canadian output. This means that the available oil supplies in the world are significantly affected so long as these fires burn. Despite the fact that oil supplies had seemed stable and greater than the available demand in the world for some time now, this situation demonstrates that it only takes one natural disaster to significantly change the worldwide oil supply equation.
Saudi Arabian Energy Minister Change Pushing Oil Prices
Another story that has been pushing oil prices recently surrounds the Saudi Arabian oil minister. On May 7th, the Saudi King Salman announced that he would be replacing long time energy minister Ali al-Naimi. Naimi had led the oil ministry of Saudi Arabia for around two decades. Saudi Arabia has been the largest exporter of oil in the world most all of this time. Their long time commitment to stabilizing world oil prices has been a bedrock of oil market expectations for more than a generation. Needless to say, when arguably the most powerful man in oil changes in Saudi Arabia, the ensuing uncertainty and fear increases oil prices as well.
World oil markets were nervous because Saudi Arabia had kept up its oil output even with lower oil prices over the last more than a year. The good news for oil consumers is that Khalid al-Falih the new energy minister has reiterated that Saudi Arabia is going to keep its policy of stable oil prices. Falih stated that the Kingdom will work to build on their past position as the most reliable energy supplier in the world. He has pledged continuity with the oil policy of his predecessor and the kingdom, despite the fact that the Saudi government has just undergone a major rearrangement. All the same, the markets became nervous enough over the remote possibility of a change in Saudi oil policy, and this demonstrates how volatile oil prices still are now.
What These Oil Stories Mean for Gold
These oil stories and their impact on oil prices are significant for gold prices as well. There has been a long term historical relationship between gold and oil prices. To demonstrate this, oil prices have been tracked and charted according to how many barrels one ounce of gold would buy. The inflationary relationship between oil and gold prices is well established. Geopolitical events that shake oil prices have a habit of moving gold prices higher also. Many times the major commodities affect and feed off of each other in world markets. When oil prices rise sharply in a short period of time, gold prices tend to go along for the ride.
Conversely in the past when oil prices have fallen significantly, this has been challenging for gold prices. Chief Commodities Analyst James Steel of HSBC Bank has made the argument that as oil prices fall, oil producers are forced to sell millions of ounces of gold. They have kept these as a protective hedge against price changes.
Volatile oil prices can quickly push inflation significantly higher. The good news is that there is a way to protect yourself and your retirement accounts against these dangers of higher prices. The fact that gold and oil prices are related is just one more reason why it is important to keep a portion of your retirement holdings in gold. This helps to protect your purchasing power regardless of what happens to the Canadian Dollar, inflation, and energy prices in the future. A stabler retirement portfolio will not only provide better for your eventual needs, it will help you to sleep better at night in the meanwhile.
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