One of the main factors that the Fed follows to set monetary policy is inflation. During the past year and a half, inflation has been subdued largely because of decreasing oil prices. Most could see this directly at the pump, where gas prices have remained relatively low since oil prices started to decline in July 2014. Not only have the consumer benefits from low gas prices, producers also benefited. Freight costs also declined as a result, contributing to price stagnation and in extreme cases to fears of deflation.
One of the assumptions during the last 2 years, was that consumers who saved money on gas, would spend it elsewhere, which would create inflationary pressures. That assumption turned out to be false. The consumers did not necessarily put their gas savings back into the economy by acquiring goods. This kept the threat of deflation alive. Now with oil getting close to the $50 USD mark, the economic situation may start turning. We might see increased rates of inflation, especially if oil can maintain its gains.
Continued supply disruptions in Nigeria, elsewhere in Africa, and in the Middle East, will provide oil with the oxygen it needs to keep on fueling rise in prices. Further declines in oil reserves in the US, and continued disruption of oil supply due to wild fires in Canada, along with the significant decreases in oil exploration over the past 2 years, could help sustain any gains that oil makes in the not so short term. If the Indian economy keeps on rising, and takes on the role that China took almost 10 years ago, then the price of oil will be able to sustain its gains in the long term. In the meantime, as interest rate increases loom, oil will be less vulnerable to them and more responsive to shifts in demand and supply.
