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How Long Will the US Dollar Influence Crude Oil Prices?

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Crude oil and the US dollar

US crude oil prices have fallen almost 35% from the peak of $62 per barrel in May 2015. Over the same period, the US Dollar Index appreciated by 3.60% against the basket of currencies. Crude oil fell almost 60% and the US dollar appreciated more than 20% since the mid-week of June 2014.

US oil prices fell due to mammoth global production and slowing demand concerns. The US dollar appreciated due to the improving US economy. The consensus of an economic slowdown from China, Europe, and Japan might loosen their interest rates in 2015. In contrast, the US might increase its interest rate in 2H15 or early 2016 due to improving economic activity. The interest rate differential and robust US economic growth will continue to put upward pressure on the US dollar. The appreciating US dollar could continue to put downward pressure on crude oil prices in the short and long term.

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Crude oil is a globally traded commodity used from transport to electricity generation. So, it’s denominated by the universally-traded US dollar. As a result, the appreciating US dollar put downward pressure on crude oil. The appreciating US dollar makes crude oil expensive for oil importing countries in their local currencies.

So, the long-term consensus of the appreciating dollar will add downward pressure to crude oil prices in the oversupplied crude oil market. In turn, this will impact US upstream players like ExxonMobil (XOM), EOG Resources (EOG), and Anadarko Petroleum (APC). These companies account for 22.61% of the Energy Select Sector SPDR ETF (XLE). Their crude oil production mix is greater than 41% of their total production.

Oil and gas ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the Select Sector SPDR Fund ETF (XLE) are also affected by long-term lower crude oil prices.

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