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What is the immediate relation between Crude Oil and US Dollar and the Shale Hydraulic Fracturing Effect

By April 24, 2017Blog
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The United States Dollar has been the international trade currency.  For all practical purposes let’s say the barrel is $50 a barrel, and the dollar strengthens.  If the dollar went up $1 in strength than this can have an effect on crude oil prices going down to let’s say as an example $46 per barrel.  This is why there is a uncorrelated relationship between the two markets, generally.

Let us say in this reverse example, where United States is the largest importer of oil from other countries.  Because the $ US Dollar is the currency being used to buy this oil, and simply the dollar is being spent in a foreign country, more currency departing our country, hence the dollar will weaken.

Sometimes the inverse relationship get’s twisted as we generate more of our own oil supply in the United States, yet still as our own producer, still import in more oil, there can be a correlated market.  And this is where traders start having scratch your head moments.

Same goes for countries that have to spend more dollars when oil price genuinely goes up and now because of big overall spending by the globe the dollar strengthens.  This has become such a complicated topic between these two currency/commodity market relationships, due to these kind of circumstances.

And now we have fracturing of shale.  This even adds more confusion to things.  It is far more complex than before.

 

The New American Shale Revolution.

A report dated back in 2014 Goldman Sachs’s Jeffrey Currie says that rationale has broken down in the wake of the American shale revolution.

“In 2008 … the US was importing on a net basis nearly 12 million [barrels per day] of oil and products,” Currie writes. “Owing to shale technology, today that number is now less than 5 million b/d. And subtracting out Canada and Mexico, the number drops to 2.4 million b/d. In other words, net imports are over 60% lower than in 2008.”

This has “significantly reduced the correlation between commodities and the US dollar,” he writes

Imports have dropped because the US is now using hydraulic fracturing to extract oil from its massive shale basins, creating more supply.

And it’s during this same 2008 – 2014 time period that there’s been a huge reduction in correlation between oil prices and the US dollar, according to Currie.

According to this analysis, although oil prices have recently dropped as the dollar has surged , one trend doesn’t explain the other.

 

 

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