Earlier this week, I said I was writing a post for the Daily Grind on The US Dollar and oil (and also gold). I did that, but my editor found the story too complex. So I turned it into a story focusing just on the US dollar.
But that doesn't mean the US dollar is not affecting oil. Quite the contrary. I think the slide in the US dollar from its peaks is one of the primary drivers in the price of oil now.
Here are my thoughts on the US Dollar and oil ...
This is a chart of the PowerShares DB US Dollar Index Bullish Fund – an ETF that tracks the US dollar closely. You can see it’s in a big uptrend. Heck, a runaway uptrend.
I circled where the UUP/US dollar gapped higher on January 23rd. Two days later, it gapped down. This price level hasn’t been touched since. That is called an “island reversal.” It is indicative of a short-term top in the U.S. dollar.
If the dollar tests support from its recent uptrend, that’s about 2% lower. Long-term support is about 4.5% away. Will it get there?
I’ll explore that in a minute.
On the bottom of the chart, you’ll see a chart comparing funds that track the US dollar and crude oil. You can see that they move opposite each other. This is because crude is priced in dollars.
So if you’re looking for a reason for crude oil’s recent rally, I’d say one BIG reason is the pullback in the dollar.
Is the Dollar Running Out of Gas?
But now, oil prices have fallen so far, so fast that drillers across America are closing down shop, at least temporarily. The oil boom has turned bust.
This makes foreign investors think that A) our economy is going to slow down and B) the Fed won’t be so quick to raise interest rates.
Meanwhile, things aren’t so bad in Europe. Greece, which had threatened to leave the euro, seems to be coming to terms with the rest of Europe. And cheap currencies are boosting exports, kicking economies on the other side of the pond into higher gear.
So now all that money starts to flow the other way.
What Does This Mean for Oil?
Since oil is priced in dollars, as the dollar goes down, oil goes up. It’s that simple. This should give oil a short-term boost. Mind you, it won’t solve oil’s long-term problems of oversupply. We’ll need to wait for production to slowly wind down and see if new drilling doesn’t start up again.
But as long the dollar goes down, oil could find support.
I'm off to Hawaii. Aloha.