Why Is the Dollar Impacting Crude Oil’s Movements?

Crude oil and the US Dollar Index

US crude oil (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) futures contracts for October delivery rose by ~1.9% between August 16 and August 23, 2016. The US Dollar Index (UUP) fell by ~0.3% during the same period. In the past five trading sessions, crude oil and the US Dollar Index have only moved in opposite directions in three instances.

Why Is the Dollar Impacting Crude Oil’s Movements?

The correlation between crude oil and the US Dollar Index during the past five trading sessions was about -45.1%. So, crude oil prices were driven by movements in the US Dollar Index to some extent. The two are usually inversely correlated. A weaker dollar makes crude oil cheaper for oil-importing countries—this boosts prices.

Correlation of crude and the US Dollar Index since 2007

Between October 2007 and April 2013, the one-month correlation between crude oil and the US Dollar Index was only positive in a few instances. The correlation coefficients were largely negative during this period.

Crude oil’s negative correlation with the US Dollar Index between October 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 past three years, these one-month correlations have fluctuated between -64% and 43%. This could indicate that fundamental drivers like the following have 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 (Organization of the Petroleum Exporting Countries) and non-OPEC production data
  • US inventory data
  • rig count data
  • other news regarding fundamentals

ETFs 

ETFs such as 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 movements in crude oil.

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