Correlation of crude oil and the dollar index since 2007
Between September 2007 and April 2013, the crude oil (USO) and dollar index (UUP) one-month correlation was positive in only a few instances. The correlation coefficient was largely negative for these five and a half years. After the sub-prime crisis, crude oil futures extended their gains and made highs of $113.93 and $109.77 in April 2011 and February 2012, respectively.
Crude oil’s negative correlation with the dollar index between September 2007 and April 2013 clearly implies that crude oil had a close relationship with the dollar index. However, since April 2013 to date, the one-month correlation has been more bi-directional. In the last three years, the one-month correlation has fluctuated between -64% and 43%. This fluctuation could indicate fundamental drivers like Saudi Arabia’s decision not to cut production, US shale oil producers’ cost and production dynamics, US inventory data, and other fundamental news that has had a greater impact on crude oil compared to the dollar.
Crude oil and the dollar index over the last six trading sessions
In the last six trading sessions, crude oil gained about 2.3% in spite of the fact that the dollar index also rallied around 1.4%. The factors that impacted crude oil futures have already been discussed in part one of this series. As discussed earlier, crude oil movement in the current scenario was more fueled by mainstream news than the dollar index was.
Oil-weighted stocks and ETFs
The above analysis is important for oil-weighted stocks such as Abraxas Petroleum (AXAS), Triangle Petroleum (TPLM), and Denbury Resources (DNR). The Direxion Daily Energy Bear 3X ETF (ERY), the First Trust Energy AlphaDEX ETF (FXN), the United States Brent Oil Fund (BNO), and the United States Oil Fund (USO) are also impacted by the correlation of crude oil with the US Dollar Index.