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Crude Oil Prices: Downward Pressure from the US Dollar

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The US dollar and crude oil

US crude oil prices have lost almost 13% since June 29, 2015, as of July 15, 2015. During this period, the US dollar index gained 3% against the basket of global currencies. Likewise, US crude oil prices have declined more than 50% since mid-June 2014. Crude oil prices declined due to massive production from the United States and Canada. The United States produced more crude oil due to technological advancement and cheaper credit facilities. The US dollar index gained more than 32% during the same period. The US dollar appreciated due to the improving US economy.

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Crude oil prices are inversely correlated to the US dollar index. This means that as the US dollar appreciates, crude oil prices decline. Crude oil is a globally traded commodity. So it’s denominated in US dollars. As the US dollar appreciates, crude oil become expensive for crude oil–importing nations in their domestic currencies.

Impact

The increase in crude oil prices affects demand and oil prices drop. Economies like Europe, China, and Japan might loosen their interest rates in 2015. In contrast, the United States is expected to increase its interest rate in the later half of 2015. These interest rate differentials and the improving US economy could strengthen the US dollar. The strengthening US dollar could pressure to crude oil prices in the oversupplied crude oil market.

Declining crude oil prices negatively affect energy producers like Hess (HES), Apache (APA), and Devon Energy (DVN). These companies account for 9.42% of the Energy Select Sector SPDR ETF (XLE). These stocks’ crude oil production mix is more than 46% of their total production.

ETFs like XLE and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are negatively affected by lower crude oil prices.

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