Historically, the price of oil is inversely related to the price of the dollar, as a barrel of oil is priced in dollars around the world.
Crude oil prices recorded a slight increase since Wednesday evening’s trading, compared to the beginning of yesterday’s session, to record Brent’s barrel price of $97.3 per barrel, the same price at which trading was opened.
The slight rise in oil prices, which may lose its gains later today or consolidate them, pending monthly data issued on Thursday by OPEC and the International Energy Agency, is due to the decline in the dollar index.
In normal circumstances, and away from the downward pressures experienced by global oil markets and fears of economic recession in the United States, the decline of the dollar is a catalyst for oil prices.
The relationship between oil and the dollar
Historically, the price of oil is inversely related to the price of the dollar, as a barrel of oil is priced in dollars around the world. And when the dollar is strong for an economy that has its own currencies, you need more local currency to get dollars.
And when the US dollar is weak, you will not need a lot of local currency to buy the dollar, thus saving foreign oil to buy the country’s need for crude oil.
The United States has historically been a net importer of oil; Higher oil prices are causing the US trade deficit to rise with the need to send more dollars abroad.
Today, due to the success of horizontal drilling and fracturing technology, the shale revolution in the United States has greatly increased domestic oil production.
In fact, the United States became an exporter of refined petroleum products in 2011, and is now the largest producer of crude oil, surpassing Saudi Arabia and Russia, with an average daily production of 11.8 million barrels.
The relationship between oil and the United States appears to be changing, reflecting the increasing role of the state in the global oil industry.
The question for producers and consumers of crude oil, has the dollar become an oil currency? A term given to the 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 producer of oil, which means that its production levels have the greatest impact on world oil prices; Before the shale oil revolution, while Saudi Arabia had this influence, but it still is.
In other words, a strong dollar usually affects oil prices because it makes the commodity more expensive for holders of other currencies, which can hurt demand for crude oil.
What happened recently?
Analysts say that in 2022, the dollar’s safe-haven appeal will strengthen as clouds gather over the economic outlook while oil rises due to disruptions to Russian supplies linked to the conflict in Ukraine and strong demand.
Today, the dollar and oil have been moving in the same direction since late March, when the positive correlation reached its highest level since May 2019, and analysts expect the correlation to continue given the tight oil market and broader risks to the global economy.
The usual inverse correlation between oil and the dollar continued rapidly for most of 2020 and into early 2021 as the global pandemic undermined demand for crude oil.
The dollar index, which measures the value of the US currency once morest a basket of its competitors, hit its highest level in more than two decades above 105 earlier this month.
While oil prices, despite fears of a US economic recession, oil prices are still in high areas near $100 a barrel.
Higher oil prices threaten the global economic outlook, which in turn tends to benefit the US dollar as it is widely seen as the safe haven currency of choice for investors.