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oil and the US dollar


kfh227
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This keeps running through my head.

 

1) Oil to some extent is trading in US dollars.

2) The US dollar is strong

3) The price of oil is down greatly

 

So, this makes me wonder how much of the drop in oil prices is tied to the strength in the US dollar.

 

If the US dollar remains strong, how can oil prices go back up if oil prices are tied to the USD?

 

I attached a USD vs Brent Crude chart for 5 years.

 

USDvsBrent.png.5a6e8e6f7211f113f6ebdf36c666fb21.png

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Seems simple.  How much is US Dollar index up?  I have 25% over 1 year (trade weighted).  Oil is down, say 55%?

 

So you have the effect wrt to the dollar right.  You had the chart in your original reply, I guess I wasn't sure what answer you wanted or were expecting.... did my above answer get to your point? So USD movement is 30-40% of Oils decline?  (maybe trade weighted isn't the right way to look at it, but probably similar answer to Oil trade weighted or something).

 

Ben

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I think it's also worth noting that some of the causation might be backwards. (or, say, inverted  ;) )

 

For example, the price of oil is down because of increasing supply. Countries that export oil (Canada, mexico, brazil, indonesia, etc) have their exports and terms of trade slashed, so their currencies depreciate against the USD.

 

There is definitely some part of the price drop that is currency related, which cushions the blow slightly for producers outside the US. My employers costs (like my salary) are mostly in CAD, while its revenues are in USD. So although the lower price of oil has hurt badly, the price of oil in CAD hasn't dropped quite as precipitously.

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I was mostly curious if I was wasting time before I spend any more time on the topic.  I might do a more thorough investigation now.  So, thank you everyone for the thoughts.

 

If you do, please come back and post your thoughts/findings. This is a very interesting topic and a good mental exercise, imo.

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