The plunge in oil prices has received no lack of media attention in recent months. It seems everywhere you turn opinions from pundits are making headlines. The purpose of this brief blog is to take a look at one angle that does not receive much attention. This is the relationship between the strength of the US dollar and corresponding price of oil. I will preface by saying that I’m not an economist and this is strictly for looking at one criterion in what is obviously a very complex issue.
The chart below tracks two funds. One (USO) is the United States Oil Fund which tracks oil movements. The second UUPT is an indexed fund which tracks the dollar. This is a leveraged index fund which in theory tracks 3X the movement of the dollar in any direction. Interestingly for most of 2013 and 2014 the two funds tracked closely. In the fall of 2014 it’s apparent where the divergence begins and really exacerbates over the past month. The dollar currently is stronger than it has been in many years at the same time that oil is at the lowest it has been in several years.
The quantitative easing that has been seen over the past few years has been on a massive scale. It has also been the policy of countries the world over. All of this additional currency is chasing investments. While the US is by no means in great economic shape, it is still viewed as relatively “safe” in comparison to the rest of the world. The additional production from US shale plays has come online at a time when many countries economies are sputtering. Many economists believe that China is not growing at the rate previously expected.
This is just presented for informational purposes. I encourage readers to do more research and to draw their own conclusions. Oil prices at any point and time can be influenced by supply/demand imbalance, geopolitical reasons amongst a host of other things. The strength of the dollar should also not be discounted when it comes to monitoring oil price trends.