Warning: Weakening Dollar May Be Artificially Supporting Oil Prices

July 31, 2020
Share
Print Friendly, PDF & Email

A soft USD often strengthens WTI, but not this time.

The U.S. dollar (USD) has lost about 5% in value against a basket of other currencies, in July. The USDX index, shown in the chart below, demonstrates the sharp decline.

In the last four years, a declining USD has been associated with rising oil prices. There is an economic reason for this. If the USD becomes cheaper, it costs more dollars to buy everything from yachts to hamburgers, to oil. Because WTI (and Brent) is denominated in USD, then a weaker USD means a barrel of oil should cost more dollars.

But the effect of the declining USD in July was not answered with higher oil prices. WTI had trouble staying away from the $40/Bbl mark.

Is the relationship between USD and WTI not holding, or is WTI priced higher than it would be if the dollar were stronger?

Below are two possible conclusions (among many) to draw from this:

  1. WTI price should be in the $30s, but it has been supported by a lower USD value;
  2. Supply-demand fundamentals are dominating the effect of the USD.

The second (2) choice is likely the truth, but the first (1) is one to consider for risk management. If the USD recovers and this recent USD weakness is merely “technical” or short-term in nature, WTI may sink as the USD support wanes.

We continue to monitor oil, gas, NGLs, and regional markets for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact [email protected]. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at [email protected]

Back to AEGIS Market Summary beta blog

Access Our Deeper Market Insights

Product Factor Matrix

Proprietary view of priced-in factors driving the market vs. potential bullish and bearish surprises.

Learn More

Trading Recommendations

Clear trading recommendations based on real market opportunities that enable clients to take action.

Learn More

Market Data

A comprehensive suite of the latest curves, spot pricing, settles, and strips to drive confident hedging decisions.

Learn More

Benchmarking and Trade Analytics

Real-time access to analyze your hedging strategy against AEGIS benchmarks and current market activity.

Learn More