Traditionally, the relationship between the value of the U.S dollar and the price of commodities, including oil, behaves inversely or negatively. That is, when the US currency is appreciated relative to other major currencies such as the euro, yen or pound, the price of commodities tends to fall, whereas, if there is a devaluation, the price of commodities will tend to increase. There are many reasons why the dollar drives commodity prices. The main one is that this currency acts as world reserve currency. The dollar is the most stable currency, so most countries require dollars as reserve assets. Therefore, when it comes to international trade in commodities, the dollar is the currency chosen for transactions.
With respect to oil, the inverse relationship discussed above has also been fulfilled, although with exceptions in some periods. the dollar-oil correlation is not perfect and recently a return to a positive correlation has been observed.
The US role in the oil market has led, among other things, to the correlation between the dollar and the oil price of a turn to a positive sign, as can be seen in the following graph:
Source: Bloomberg, Morgan Stanley
In recent months, a significant depreciation of the dollar has been observed, especially against the euro, reaching levels not seen since January 2015 ($ 1.20 / €). The exchange rate has reached those quotas not so much by a strong euro but by a weak dollar. In the absence of news on new rate increases from the Fed, there is a great level of uncertainty that could be established following a US spending ceiling, which is increasingly likely due to the lack of support receiving Donald Trump. The recent political tension between the American country and North Korea is a further risk factor in this regard.
However, this significant fall in the dollar has not been reflected in a rise in the price of oil. Since mid-April, the dollar has depreciated around levels close to 10%, while the price of crude oil has remained stable at an average of 50 $ / barrel.
Basically, there are two most important factors why the dollar-oil ratio is no longer in a clear negative correlation anymore.
- The lower US commercial dependence on crude oil
US imports are declining, mainly from Saudi Arabia, while their exports do the opposite, allowing the US country to reduce its trade deficit. This policy is expected to continue. Current US President Donald Trump has vowed to significantly reduce dependence on oil, ie imports from OPEC.
If the US continues to grow the share of exports over imports, oil revenues will play a leading role in its economy and will have more importance for the dollar.
- The US has become the so-called “swing producer” worldwide.
That is, their production levels (9.4 mbd) has enough power to regulate the market. This role has historically been occupied by OPEC, led by Saudi Arabia. Thus, oil price movements increasingly have to do with inventory levels or the level of US production than with actions taken by OPEC members.
The two factors mentioned do not seem to change in the short term, the often talked about shale revolution in the US is here to stay. Therefore, the correlation seen between dollar and oil could consolidate in the coming months.
If so, the dollar will become a “petrocurrency”, a term that is used when the income derived from the oil export of the country determines its economic growth.
Enrique Battistinis | Energy Consultant