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US Dollar Influences Crude Oil Prices

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Oct. 8 2020, Updated 1:11 p.m. ET

Crude oil and the US Dollar Index

US crude oil (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) futures contracts for November delivery rose ~9% between September 27 and October 4, 2016. The US dollar (UUP) rose ~0.8% during the same period. The rise in the dollar coincides with the market’s expectation of an interest rate hike. In the past five trading sessions, crude oil and the US Dollar Index moved in opposite directions in two instances.

The correlation between crude oil and the US dollar during the past five trading sessions was about -56.9%. This shows the impact of the US dollar on oil prices. A weaker dollar makes crude oil cheaper for oil-importing countries—this boosts prices.

It also means that when the dollar strengthens, it could pressure crude oil prices. The Fed indicated that it might raise rates this year. When the Fed raises the rates, it could push the dollar higher.

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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.

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 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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