Crude Oil Rose from Weak Dollar: Will It Hit a High in 2016?



Why crude oil prices rose

WTI (West Texas Intermediate) crude oil futures contracts for June delivery trading in NYMEX (New York Mercantile Exchange) rose by 3.3% and closed at $44 per barrel on Tuesday, April 26, 2016. Brent crude oil futures trading in ICE (Intercontinental Exchange) rose by 2.8% and closed at $45.70 per barrel. Prices rallied due to a depreciating US dollar index. The United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO) rose by 2.5% and 4.5%, respectively, on April 26.

[marketrealist-chart id=1251125]

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US dollar index 

The US Dollar Index fell by 0.29% and was trading at 94.6 levels on Tuesday, April 26, 2016. The index fell due to the expectation of dovish comments from the Federal Reserve, which could mean the Federal Reserve might delay the interest rate hike in 2016.

The US dollar is inversely related to crude oil. The depreciating US dollar makes crude oil cheaper for oil importing countries. The PowerShares DB US Dollar Index Bullish ETF (UUP) tracks the performance of the US dollar. USO tracks the performance of US crude oil futures contracts. The above graph shows the inverse relationship between the US dollar and crude oil.

Gasoline prices 

June gasoline futures contracts rallied almost 4% to $1.57 per gallon on Tuesday, April 26, 2016. The uptick in gasoline prices also boosted crude oil prices. Gasoline prices rallied due to the expectation of a rise in gasoline demand in 2016 compared to 2015.

Gasoline demand is expected to rise in 2016 due to people driving more miles this summer. Lower gasoline prices have motivated drivers to buy more sport utility vehicles and trucks, which consume more gasoline than other vehicles. The improvement in the labor market also motivated drivers to buy more vehicles. Warmer than normal weather also encouraged US drivers to drive more in early 2016. Gasoline demand is expected to rise 1.4 % year-over-year.

You could consider investing in the United States Gasoline ETF (UGA), which tracks the performance of front month RBOB (Reformulated Gasoline Blendstock for Oxygen Blending) gasoline futures contracts. 

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Are crude oil prices close to 2016 high?

The uptick in gasoline prices, the bearish American Petroleum Institute’s crude oil stocks report, and the depreciating dollar could push crude oil prices to 2016 highs. Crude oil is currently trading close to a four-month high.

The rise in gasoline prices benefits US refiners. High crude oil prices benefit oil producers such as Denbury Resources (DNR), PDC Energy (PDCE), Goodrich Petroleum (GDP), and Cobalt International Energy (CIE).

The volatility in the oil and gas market impacts ETFs such as the iShares US Oil Equipment & Services ETF (IEZ), the Direxion Daily Energy Bear 3X (ERY), and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO).

Series focus

This series focuses on the bullish and bearish catalysts for crude oil prices. We’ll also look at the American Petroleum Institute’s US crude oil, gasoline, and distillate inventories.

In the next part, we’ll look at the bullish catalysts for crude oil prices this week.


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