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Why Is Oil Moving Independent of the Dollar?

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Crude oil and the US Dollar Index

US crude oil (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) futures contracts for November delivery fell ~3.1% between September 13 and September 20, 2016. The US Dollar Index (UUP) rose ~0.4% during the same period. The rise in the dollar coincides with the market’s expectation of a rate hike. In the past five trading sessions, crude oil and the US Dollar Index have moved in opposite directions in two instances.

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The correlation between crude oil and the US Dollar Index during the past five trading sessions was about -19.8%. This isn’t sufficient to show the impact of the US Dollar Index on oil prices. A weaker dollar makes crude oil cheaper for oil-importing countries—this boosts prices. However, this wasn’t supported by the quantitative relationship seen in the last few days.

Correlation between 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 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 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 past three and a half 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.

Visit Market Realist’s Upstream Oil and Gas page for the latest updates and more.

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