A stronger dollar is one reason—along with a slower global economy—that commodity prices in general, and oil in particular, continue to fall. Since oil is traded in U.S. dollars, when the dollar moves higher, oil prices tend to fall. This is exactly what has been happening: Recently, the U.S. oil benchmark West Texas Intermediate (or WTI) traded down to its lowest level since 2009. Another catalyst for the move was news that Saudi Arabia cut its prices for the United States.
Market Realist – Weak global demand and a strengthening dollar have affected oil prices.
Changes in the dollar explain a good chunk of the change in oil prices historically. Using weekly data for the last ten years, we can see that a rise or fall in the US dollar (UUP) has explained 76% of the rises and fals in oil prices (USO). In other words, the correlation coefficient between the two is -76%.
The graph above proves this relationship. The dip in the WTI crude oil price from about $115 per barrel to below $50 per barrel has coincided with the rise in the dollar. We explained the reasons for the strengthening dollar in the previous part of this series.
However, the dollar alone isn’t responsible for the slump in oil prices (USO). Softening growth in Europe (EZU), Japan (EWJ), and China (FXI)—among other countries—has led to subdued demand for oil. Also, as we mentioned above, the OPEC (Organization of the Petroleum Exporting Countries) has been unwilling to cut production as US refineries have kept production high.
However, oil prices have increased this month due to the cut in production in the US. Some analysts feel that oil prices could be bottoming out.
Read on to find out which sectors benefit from the dip in oil prices.