Energy Commodities: Gauging the Impact of Inflation

US CPI inflation

The US CPI (consumer price index) fell 0.3% on a month-over-month basis in March 2017, according to a report by the US Department of Labor on April 14. It was below analysts’ forecasts, which expected the index to remain flat.

Energy Commodities: Gauging the Impact of Inflation

Lower CPI inflation could mean a slowdown in consumer demand and economic activity. It could translate into less fuel consumption, which would be bearish for crude oil prices (USO)(BNO) and natural gas prices. Crude oil is used to make transportation fuels like gasoline and diesel while natural gas is used for power generation.

Impact of the US dollar on crude oil and natural gas

US CPI data could also be an important driver for the US dollar (UUP)(USDU). Inflation data impact the Fed’s interest rate decisions. The Fed’s benchmark interest rate can affect the US dollar.

Between April 7 and 13, the US dollar fell 0.6%. US crude oil May futures rose 1.8% while natural gas May futures fell 1% during the same period. A weaker dollar makes crude oil cheaper for oil-importing countries, which support crude oil (USL) prices. The opposite is also true.

Natural gas wasn’t exported in large quantities outside North America until recently, so it hasn’t historically had a similar relationship with the US Dollar Index.

Last week, crude oil moved inversely of the US dollar, but natural gas moved independently, as the above graph shows.

Impact on energy ETFs

Energy ETFs are also impacted by economic data and the relationship that crude oil (UCO)(USO)(OIIL)(BNO) and natural gas (GASL)(GASX) prices have with the US dollar. These ETFs include the Direxion Daily Energy Bear 3X ETF (ERY), the First Trust Energy AlphaDEX ETF (FXN), the ProShares UltraShort Bloomberg Crude Oil (SCO), the iShares US Oil Equipment & Services (IEZ), and the Energy Select Sector SPDR ETF (XLE).

In the next part of this series, we’ll look at the relationship that crude oil and natural gas have with the S&P 500 Index.