Something funky is happening between oil and the US dollar.
Historically, there’s been a pretty consistent correlation between the commodity’s price and the currency.
Whenever the dollar strengthened, oil prices would fall and vice versa.
However, as Societe Generale’s Global Head of Economics Michala Marcussen pointed out in a recent note to clients, something is a bit off right now.
From her note (emphasis ours):
“Looking over the latest numbers gathered by Consensus Economics, the overall consensus from economists is one of ongoing (albeit tepid) recovery, a stronger dollar and gradually rising interest rates. A more detailed look, however, shows several pieces of the puzzle don’t quite fit. Both consensus and market pricing, reassuringly, sees oil at close to $50/barrel one year out. A simple correlation, however, suggests that the consensus for dollar appreciation is more consistent with oil at closer to $30/barrel.”
Notably, way back in October 2014 Goldman Sachs’ Jeffrey Currie actually touched on this subject.
In a note to clients, he argued that although for the longest time the oil-dollar relationship had been explained by the huge flow of US oil imports, that rationale had broken down in the wake of the American shale revolution.
Here are the key parts from what he wrote back then (emphasis ours):
“In 2008 … the US was importing on a net basis nearly 12 million barrels per day of oil and products. Owing to shale technology, today that number is now less than 5 million barrels per day. And subtracting out Canada and Mexico, the number drops to 2.4 million barrels per day. In other words, net imports are over 60% lower than in 2008. … [This has] significantly reduced the correlation between commodities and the US dollar. …
Along with the post-crisis financial market normalization, [the drop in oil imports] has dramatically reduced the correlation between oil and the USD, to around 0% (i.e. uncorrelated)
today from historical highs near 60% in 2008/2009.”
Somewhat interestingly, back when Currie wrote about this, oil prices just started dropping, while the dollar was surging. So, according to his analysis, one trend didn’t explain the other.
In any case, ultimately, perhaps what’s the most important for oil are the fundamentals of supply and demand, as Marcussen added in her note.
And, for what it’s worth, Goldman Sachs thinks oil’s oversupply might be over.
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