Housing data… auto manufacturing struggles… high energy inventories… These all spell out the one thing affecting oil prices: demand.

Here’s the interesting thing, though. In times of low demand, low prices normally stir up more demand. Not so in this global economic crisis. Right now we have falling oil prices and falling demand.

“The contraction in global oil consumption this year will be the first since the early 1980s and the steepest since the mid- 1970s, according to Nobuo Tanaka, executive director of the International Energy Agency. The Paris-based adviser to 28 nations has cut its 2009 demand forecast seven times,” reports Bloomberg.

Falling oil prices have stirred up concern among oil producing nations. And it’s not only OPEC that’s worried. Russia is now spending currency reserves it amassed during the oil bull run.

It needs these funds to help keep its economy afloat, and falling oil prices means a failing Russian economy.

In an interview with The Wall Street Journal’s Gregory White, Russia’s Deputy Prime Minister for the energy sector, Igor Sechin, credited high oil prices “with allowing Russia to build up the reserves it is now spending to support the economy.”

And now that oil prices have fallen so drastically, “oil companies are starved for vital capital to invest in new projects,” he said.

Eventually, this could lead to a contracted supply, enough so to make prices begin to climb again. Sechin told White, “If companies don't have access to stable financial resources for the long term, that could lead to a shortage and to a sharp increase in prices for oil and oil products.”

But most analysts are now saying that oil prices are still trading too high. In the U.S., James Williams, an analyst at WTRG Economics told MarketWatch that oil should be trading at $35 a barrel, given current demand statistics.

And oil demand is expected to fall in 2009 for the second straight year. Oil inventories are also on the rise, putting further pressure on prices that had climbed recently.

So if oil prices had been climbing, even though the supply and demand factors suggest that prices should be $35 a barrel – $13 less than current prices – what’s propping prices up?

One of the reasons was the stock market rally… High investor confidence for a market bottom spurred prices higher.

But because supply is at a 16-year high and demand continues to shrink, there was nothing to support these higher prices. Right?

There is another factor that affects the price of oil: the U.S. dollar.

“The greenback rose against the euro and the pound [on Tuesday], which put severe pressure on oil prices, [Liberty Trading Group president James] Cordier said. Crude is sold in dollars across the world,” reports CNNMoney.

That means a strong dollar leads to lower oil prices and a weak dollar leads to higher oil prices.

Adam Lass, editor of WaveStrength Options Weekly, writes, “In the end, more dollars without more GDP simply means weaker dollars, each one capable of doing less. And not only the ones they are printing, mind you, but all of them, including the ones you are holding too.”

The government’s stimulus plan will ultimately lead to inflation, and that spells higher oil prices.

“It’s called inflation, folks,” Adam says, “and we are already seeing it reappear in the nooks and crannies of the system. Producer prices are starting to climb again, as are consumer prices. And as in the beginning of most every inflationary cycle in recent memory, energy is leading the charge.”

That means in the long run, this contraction in oil prices might be a great opportunity for investors to get positioned in energy.

Other Related Topics: Commodities Investment , Crude Oil , Energy Products , Sara Nunnally , Taipan Insider

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