How Has the US Dollar Affected Oil Prices?

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Jul. 13 2016, Published 2:34 p.m. ET

Crude oil and the US Dollar Index

Crude oil (USO) rose 0.43% between July 5 and July 12, 2016. The US Dollar Index (UUP) rose about 0.3%. Renewed bearishness due to the Brexit news had caused a 0.7% rise in the dollar index in the week between July 1 and July 8. The US dollar rises during economic uncertainty. In all five of the last trading sessions, crude oil and the dollar index have moved in the opposite direction.

The correlation between crude oil and the US Dollar Index in the last five trading sessions was approximately -90.0%. This shows the strong inverse relationship between the two assets over the last few days.

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Correlation of crude oil and the US Dollar Index since 2007

Between September 2007 and April 2013, crude oil and the US Dollar Index’s one-month correlations were positive in only a few instances. Their correlation coefficients were largely negative during this period.

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 US 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 a greater impact on crude oil than the US dollar:

  • Saudi Arabia’s decision not to cut production
  • US shale oil producers’ cost and production dynamics
  • OPEC and non-OPEC production data
  • US inventory data
  • rig count data
  • other news regarding fundamentals

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), RSP Permian (RSPP), Northern Oil and Gas (NOG), Oasis Petroleum (OAS), 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), the Direxion Daily S&P Oil & Gas Exploration & Production Bull and Bear 3x Shares (DRIP), and the United States Oil ETF (USO) are also impacted by crude oil.

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