Crude oil and the US dollar
US crude oil prices have fallen more than 25% since the peak in May 2015. Over the same period, the US dollar index appreciated more than 3% against the global currencies. Crude oil prices fell more than 55% since mid-June 2014. Prices fell due to mammoth production from the US and Canada. The shale oil boom in the US, due to technological advancement and cheaper credit facilities, supported the rise in crude oil production. The US dollar index appreciated more than 32% against the global currencies during the same period. The US dollar strengthened due to the improving US economy.
Impact of the US dollar
The US dollar index appreciated against the basket of currencies in yesterday’s trade. The appreciating US dollar negatively impacts crude oil prices and vice versa. Crude oil is a globally traded commodity. So, it’s denominated in the US dollar. The strengthening dollar makes crude oil expensive for oil importing countries.
The long-term lower crude oil prices also impact oil and gas producers like ConocoPhillips (COP), Apache (APA), and Devon Energy (DVN). Combined, they account for 7.35% of the Energy Select Sector SPDR ETF (XLE). These stocks’ crude oil production mix is more than 48% of their production portfolio. They also impact ETFs like XLE and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).
The consensus of an economic slowdown from countries like China, Europe, and Japan might loosen their interest rates in 2015. In contrast, the US might increase its interest rate in the later half of 2015 due to improving economic activity. These factors could strengthen the US dollar. The appreciating US dollar could continue to put pressure on crude oil prices.