How Does the Weaker Dollar Impact Crude Oil?



US Dollar Index and crude oil

In the last week, March WTI crude futures rose by 8% from its bottom in the previous week because of a weaker dollar. However, as of February 5, 2016, WTI futures managed to close about 3% above the weekly lows. The Spot Dollar Index fell by 2.5% from its weekly highs. It managed to close about 2% below its weekly highs. On a YTD (year-to-date) basis, the US Dollar Index fell by 1.6%. Last year, the US Dollar Index rallied by about 9.3% on a YTD basis.

[marketrealist-chart id=1034421]

The above chart shows the US Oil Fund Partnership Units (USO) and the PowerShares DB US Dollar Bullish ETF (UUP). It helps explain the negative correlation between crude and the US Dollar Index.

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The US Dollar Index is negatively correlated with the commodity price. Since a commodity is dollar denominated, an appreciation in the dollar directly implies a subsequent fall in crude oil’s price. Experts think that the Fed might not raise interest rates this year. Since the interest rate is positively correlated with the currency’s strength, a dovish stance by the Fed will be positive for the commodity.

In the next part, we’ll discuss the moving averages and analysts’ estimates for US-based (SPY) upstream companies such as Anadarko Petroleum (APC), ConocoPhillips (COP), Pioneer Natural Resources (PXD), EQT (EQT), and others.


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