Regular readers will know that I believe that one of the most important fundamental influences on the price of oil is the relative strength or weakness of the U.S. Dollar. Obviously according to economics 101 supply and demand ultimately set the price of any commodity, but when, as is the case with oil, that commodity is priced in dollars in a global market the intrinsic value of the dollar is just as important.
Normally the dollar index, which gives the average value of the dollar against a basket of other currencies, moves fairly slowly so judging the impact on oil prices is about predicting long term trends. Sometimes, though, things change quite fast and even short term predictions for oil are dependent on the fate of the dollar. That seems to be the case right now, so traders should be watching the dollar’s movement closely.
(Click to enlarge)
Figure 1: Dollar Index 1 Year Chart
In case you have not been following it the dollar index has, like most things, been on the move since the U.S. elections. As the so called “Trump Bump” pushed American assets higher, so the dollar also gained ground. That is normal in times of optimism about U.S. growth, but because of the cause, as well as mounting evidence that OPEC’s restrictions on output were actually taking place, oil followed suit, which is not typical. WTI jumped from around $45 at the beginning of November to above $55 at the end of the year.