US dollar and crude oil performance in 2015
The US Dollar Index strengthened against the basket of currencies by 9% in 2015 due to the improving US economy and the interest rate hike by the Federal Reserve. On December 16, the Federal Reserve raised the key interest rate by 0.25% to 0.5%. This was the first change since 2006. In contrast, US crude oil process fell more than 35% in 2015 due to oversupply concerns.
Relationship between the US dollar and crude oil
The US dollar (UUP) and crude oil are inversely correlated. A weaker US dollar makes oil economical for oil-importing countries in their domestic currency. In contrast, appreciation of the US dollar makes crude oil expensive for crude oil-importing countries.
Crude oil prices in 2016
Preliminary surveys suggest that the next US interest rate hike could take place in April 2016. The median target for the interest rate in 2016 is ~1.4%, according to market surveys. Reuters surveys speculate that US interest rates could range between 1% and 1.3% in 2016. They are expected to rise by 2.3% by the end of 2017. The US GDP (gross domestic product) is expected to grow by 2.2% in 2015 and 2.4% in 2016.
The diverging monetary policies and the consensus of an improving US economy should strengthen US dollar in 2016. The rising US dollar dragged oil prices lower in 2015 and will continue to do so in 2016.
Read how Russia will influence the crude oil market in the next part of this series.