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US Dollar above 100 Mark: Will Crude Oil Prices Fall?

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Crude oil and the US dollar index

US crude oil (USO) (USL) (OIIL) (DWTI) (UWTI) (SCO) futures contracts for January delivery rose ~12.6% between November 29 and December 6, 2016. The US dollar (UUP) (USDU) fell ~0.4% during that period.

In the past five trading sessions, crude oil and the US dollar index moved in opposite directions in four of five instances. However, the correlation between crude oil and the US dollar in the past five trading sessions was about 38.1%. The short timeframe of analysis doesn’t show the inverse relationship between the US dollar and oil prices.

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However, a weaker dollar makes crude oil cheaper for oil-importing countries, which boosts prices. When the dollar strengthens, it can pressure crude oil prices. President-elect Donald Trump’s proposed inflationary policies combined with an already hawkish Fed point to higher interest rates in the future. These two factors have helped push the dollar higher.

Long-term correlation between crude oil and the US dollar index

Between September 2007 and April 2013, the one-month correlation between crude oil and the US dollar index was positive in only a few instances. The correlation coefficients were largely negative during that period. The negative correlation implied that crude oil had an inverse relationship with the US dollar index.

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Effect of special events on the dollar-oil correlation

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, the one-month correlations fluctuated between -64.0% and 43.0%.

The correlations indicate that the following fundamental drivers sometimes had greater impacts on crude oil than the US dollar:

  • Saudi Arabia’s decisions on 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

Trump’s energy policy could also mean increased production of crude oil, natural gas, and coal in the United States. In addition, Trump’s policy could also lead to a stronger US dollar. Both these factors could have a negative effect on crude oil prices.

ETFs and crude oil

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 Bear 3x ETF (DRIP), and the United States Oil ETF (USO) are also impacted by movements in crude oil.

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