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Do Oil Traders Need to Worry about the US Dollar?

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Crude oil and the US Dollar Index

US crude oil (USO) (USL) (OIIL) futures contracts for April delivery rose 1.6% between February 14, 2017, and February 21, 2017. The US Dollar Index (UUP) (USDU) didn’t change during that period.

In the past four trading sessions, crude oil and the US dollar moved in opposite directions in only one instance. The correlation between crude oil and the US dollar in the past four trading sessions was 8.7%. It doesn’t show the inverse relationship between the US dollar and oil prices in this short timeframe. However, a stronger dollar makes crude oil more expensive for oil importers, which has a negative impact on prices. When the dollar strengthens, it can pressure crude oil prices.

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Long-term correlation between crude oil and the US dollar

Between September 2007 and April 2013, the one-month correlation between crude oil and the US dollar was positive in only a few instances. The correlation was largely negative during that period.

However, from April 2013 to date, crude oil and the US dollar’s one-month correlations have been more bidirectional. Between April 2013 and February 2017, the one-month correlations fluctuated between -64.0% and 43.0%.

The correlations during this period could mean that the following fundamental drivers sometimes had a greater impact on crude oil than the US dollar:

  • Saudi Arabia’s production decisions
  • US shale oil producers’ cost and production dynamics
  • OPEC and non-OPEC production and supply data
  • US inventory data
  • rig count data
  • other news regarding fundamentals

President Trump’s energy policy could mean increased crude oil, natural gas, and coal production in the US. It could have a negative impact on crude oil prices.

While fundamental factors dominate, the US dollar’s impact on crude oil prices could be limited in the long term. Global demand could be the biggest driver of crude oil prices in the long term

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.

In the next part, we’ll look at the relationship between crude oil prices and the futures forward curve.

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