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Is the US Dollar Contributing to Crude Oil’s Fall?

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Crude oil and the US Dollar Index

US crude oil (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) futures contracts for September delivery fell by ~8% between July 26 and August 2, 2016. The US Dollar Index (UUP) fell by about 2.2% over the same period. The fall in the dollar came after the Fed kept the benchmark interest rate unchanged on July 27, 2016. Weak GDP data led to a ~1.3% fall in the US Dollar Index on July 29,2016. In the past five trading sessions, crude oil, and the US Dollar Index have moved in opposite directions in two instances.

The correlation between crude oil and the US Dollar Index during the past five trading sessions was about -1%. This shows that oil prices were impacted more by fundamental news than by the US Dollar Index during that period.

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Correlation of crude and the US Dollar Index since 2007

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

Crude oil’s negative correlation with the US Dollar Index (UUP) 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 (UUP) 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 (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) 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

Oil-weighted stocks and ETFs

The above analysis is important for oil-weighted stocks like Abraxas Petroleum (AXAS), Halcon Resources (HK), Triangle Petroleum (TPLM), RSP Permian (RSPP), Northern Oil & 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 movements in crude oil.

Keep checking in with Market Realist’s Upstream Oil and Gas page for updates on this and more.

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