US dollar and crude oil performance
The US Dollar Index rose by 2.1% since October 9, 2015. Over the same period, crude oil prices fell almost 11%. The US Dollar Index was trading at 96.8 levels in yesterday’s trade. Likewise, December WTI (West Texas Intermediate) crude oil futures contracts settled at $43.98 in Monday’s trade. The US Dollar Index tracks the performance of the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc with respect to the US dollar.
US dollar and crude oil relationship
The US dollar is a universal currency. Globally-traded commodities like gold and crude oil are denominated in the US dollar. As a result, an appreciating dollar makes crude oil expensive for oil importing nations. So, the rise in prices leads to a fall in demand. In contrast, a depreciating dollar makes crude oil cheaper for oil importing nations. So, lower prices support crude oil demand and benefit crude oil prices.
The US dollar is expected to strengthen from the current levels due to diverging monetary policies. The People’s Bank of China reduced the Chinese interest rate for the sixth time since November 2014 to boost the slowing economy and curb deflationary concerns. The ECB (European Central Bank) speculates that it will continue its stimulus program until September 2016 to boost the slowing European economy. Pumping liquidity into the economy from economies like China, Europe, and Japan will likely widen the interest rate differentials. So, the US will be an attractive investment opportunity. This will cause the US dollar to strengthen more.
The appreciating US dollar makes dollar-denominated crude oil expensive for nations that import crude oil. As a result, falling crude oil prices impact US upstream players like Noble Energy (NBL), Laredo Petroleum (LPI), Whiting Petroleum (WLL), and Occidental Petroleum (OXY). The roller coaster ride of crude oil prices also impacts ETFs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO) and the iShares US Oil & Gas Exploration & Production ETF (IEO).