Oil is traded in dollars; that brings in exchange rates

While supply and demand are doubtless the most crucial factors in determining oil price, they are not the only key variables.

Almost every country, with the exception of Iran and Venezuela, trades oil in dollars. This means that the strength of the dollar at least partially drives the price of oil. A strong dollar keeps oil prices low, while a weak dollar exerts inflationary pressure on prices.

At this month’s Energy Finance Discussion Group in Denver, Hein Principal Jim Harden examined the effects of the strength of the dollar on oil prices.

Harden’s analysis studied WTI oil and the exchange rate of euros to dollars, as this is the largest currency index in the world. Harding told the attendees that WTI and the euro to dollar exchange rate are well correlated. Displaying an R2 of 0.76 over the past 15 years. The coordination of oil prices and the exchange rate became remarkably close in 2008, before prices crashed from all-time highs.

According to Harding, “When oil hit $148 NYMEX, one other thing happened. That same hour the U.S. dollar hit an all-time low.”

Oil Price and Currency Relationships: Beyond Energy Supply and Demand

Source: Hein

Close correlation in recent years

While oil prices and exchange rates are relatively close over the past 15 years, they are highly correlated in recent times. Since the beginning of 2013 WTI and the euro to dollar exchange rate display an R2 of 0.944.

Oil Price and Currency Relationships: Beyond Energy Supply and Demand

Source: Hein

Recent weakening of dollar has not produced response: ‘oil should be about $58 now’

However, this relationship seems to have diminished in recent months. The U.S. dollar has been weakening for the past six months, a move that oil prices have not mirrored.

“There’s about a $6 to $8 dollar headroom in oil right now,” Harding commented. “if the relationship was 100%, oil should be about $58 now.”


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