Crude oil is back in the news as its prices have again risen above $50 per barrel. This is due to geopolitical tension following the missile attack on Syria by the US.

Prior to the recent bounce-back, crude oil prices were in a sustained decline almost all through last month, triggered by the increasing inventory levels in the US.

These are, however, short-term influences on crude oil prices. A more important determinant of crude oil prices is the US dollar. A study on various legs of movement in the US dollar index since 1991 suggests that the greenback has a strong negative co-relation with the crude oil price.

Out of the 26 legs of move (both up and down) analysed, a strong negative correlation between the two was observed in 20 of the moves, that is 77 per of the times.

This is because, crude oil is priced in US dollars. So, a sharp rise in the dollar value makes it costlier for the oil buyers and so the prices fall. Similarly, when the US dollar falls, oil price becomes cheaper and hence starts rising with higher demand.

For instance, when the US mortgage crisis hit the global markets, the US dollar index, which was suffering a prolonged and multi-year fall, witnessed a sharp upward reversal. The index rose from its low around 72 to test 90 levels. This sharp rally in the dollar saw crude oil prices tumble from the all-time high around $145 per barrel to a low of $35 per barrel. Similarly, between June 2010 and April 2011 when the dollar index fell about 17 per cent, crude oil prices surged 59 per cent. However, there were instances when both the dollar and oil price moved in the same direction. But most of these exceptions occurred in the earlier period, between 1998 and 2001. For example, both the dollar index and the crude oil price fell between November 2000 and January 2001 by 8.5 per cent and 21 per cent respectively. Since 2006 there has been only one instance when both the dollar and crude oil prices have moved in the same direction. This was last year between April and December 2016 when both the dollar and crude oil surged 11 per cent and 15 per cent, respectively.

Other factors

Along with the dollar, factors like the global demand-supply scenario also join hands in moving the oil prices. Take, for instance, the supply glut that began to hit the global oil market in 2014. Oil prices plummeted by 51 per cent between April 2014 and March 2015 and the dollar index rose 20 per cent in the same period. Also, inventory data and geo-political tensions may induce temporary volatility in the prices.

Where is it headed?

Geopolitical tensions are playing a major role in lifting crude oil prices higher currently. So, as long as this uncertainty prevails, the dollar might not influence its movement too much.

Also, on the charts, the dollar index is coming down over the last couple of days, failing to break above 101. Unless the index breaches above 101.5 decisively, the short-term view is negative. It may fall back to 99.5 and 99 levels once again, which could be positive for oil. Crude oil in itself is looking strong on the charts. The level of $55 is likely to be revisited in the coming days. A strong rise past this level may pave the way for a fresh rally to $57 or even $60.

comment COMMENT NOW