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The U.S. Dollar And Oil Relationship Is Changing

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Historically, the price of oil is inversely related to the price of the U.S. dollar.

The explanation for this relationship is based on two well-known premises.

  1. A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S. dollar is weak, the price of oil is higher in dollar terms.
  2. The United States has historically been a net importer of oil. Rising oil prices cause the United States trade balance deficit to rise as more dollars are needed to be sent abroad.

The former still holds true today, the latter….not so much. Due primarily to the success of horizontal drilling and fracking technology, the U.S. shale revolution has dramatically increased domestic petroleum production.

In fact, the United States became a net exporter of refined petroleum products in 2011, and has now has become THE largest producer of crude oil overtaking Saudi Arabia and Russia!

The U.S. Dollar And Oil Relationship Is Changing

According to the Energy Information and Administration (EIA), the United States is now about 90% self-sufficient in terms of total energy consumption.

The technological breakthrough of fracking has disrupted the status quo in the oil market, much like how Kylie Jenner’s Lip Kits disrupted the status quo in the cosmetic industry.

As U.S. oil exports have increased, oil imports have decreased. This means that higher oil prices no longer contribute to a higher U.S. trade deficit, and actually helps to decrease it.

As a result, we’ve seen the historically strong inverse relationship between oil prices and the U.S. dollar is becoming more unstable.

The U.S. Dollar And Oil Relationship Is Changing

Over the past eight years, the rolling 6-month correlation coefficient was mostly negative but that’s starting to change.

The U.S. Dollar And Oil Relationship Is Changing

Considering the new dynamics of the global energy market, it wouldn’t be surprising to see this historically negative correlation spend more time in positive territory.

The relationship between oil and the United States seems to be changing, reflecting the country’s growing role in the global oil industry.

Is the dollar becoming a petrocurrency? A term given to currencies of countries like Canada, Russia, and Norway that export so much oil, that oil revenues make up a large part of their economy.

The United States has become the new swing producer of oil, meaning that its production levels hold the most influence over global oil prices. Before the shale revolution, it was Saudi Arabia.

The U.S. may start to trade more like a petrocurrency in the years to come. As the US continues to grow the share of oil exports over imports, revenue from oil will play a greater role in the U.S. economy, and the U.S. dollar may start behaving like a petrocurrency….meaning when oil prices goes up, so does the currency.

Understanding why the dollar has historically traded inversely to the price of oil and why the correlation has weakened recently can help traders make more informed trading decisions as the global economy continues to evolve.

Reprinted from Babypipsthe copyright all reserved by the original author.


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