uploads///Weaker Dollar Driving Crude OIl

Can the Fall in the Dollar Boost Crude Oil?

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Dec. 4 2020, Updated 10:53 a.m. ET

Crude oil and the US dollar index in the last six trading sessions

From June 14–21, 2016, crude oil (USO) rose ~0.7%, while the US Dollar Index (UUP) fell about 0.96%. The index initially fell after the Fed kept interest rates unchanged on June 15, 2016. Read A Review of Energy Companies on FOMC and Crude Inventory Day to know more about the price reaction of energy stocks on June 15.

After a low of 93.6 on June 8, the dollar index started to recover on the hope of a possible rate hike on June 15. On June 8, crude oil touched its 2016 high of $51.23.

The correlation between crude oil and the dollar index in the last five trading sessions was approximately -60.6%. This shows the degree of the inverse relationship between the two assets. Recent movements in crude oil have been fueled by the fall in the dollar index.

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Correlation of crude oil and the US Dollar Index since 2007

Between September 2007 and April 2013, crude oil (USO) and the US Dollar Index’s (UUP) one-month correlations were positive in only a few instances. Their correlation coefficients were largely negative for five and a half years.

Crude oil’s negative correlation with the US Dollar Index between September 2007 and April 2013 clearly implies that crude oil had an inverse relationship with the US Dollar Index.

However, from April 2013 to date, crude oil, and the dollar index’s one-month correlations have been more bidirectional. In the last three years, these one-month correlations have fluctuated between -64% and 43%. This could indicate that the following fundamental drivers sometimes had greater impacts on crude oil than on the dollar:

  • Saudi Arabia’s decision not to cut production
  • US shale oil producers’ cost and production dynamics
  • US inventory data
  • other fundamental news

Oil-weighted stocks and ETFs

The above analysis is important for oil-weighted stocks such as Abraxas Petroleum (AXAS), Halcon Resources (HK), 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 ETF (BNO), and the United States Oil ETF (USO) are also impacted by crude oil.

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