Crude Oil Prices benchmarked to WTI (West Texas Intermediate) in the United States has historically shared a negative correlation with the US Dollar explaining up to 76% of the relationship. The reasons for the negative relationship are as follows:
1. Commodities are denominated in the USD as a pricing mechanism for trade. Hence a strengthening dollar will pull down commodity, particularly Oil prices.
2. Before the Shale discovery in the United States, the United States was a major importer of Crude Oil. The higher imports added downward pressure on the USD and an upward pressure on the Oil prices. In 2008 Crude Oil reached the high level of $147 per barrel, when the US was importing approximately 12million Barrel/PD. The USD was at the weakest during the time.
3. Higher Crude oil production in the United States has in turn strengthened in the US economy and the currency, which is one of the major influencers to the declining Crude Prices.
The strength of the correlation between the USD and Crude Oil Prices has however dropped significantly post Shale revolution in the United States with vague and unexplained relationship in many quarters. With OPEC influencing Oil production and Prices combined with USD entering a range bound with 93 on the lower side and 100 on the upper side, Crude Oil Prices have reacted independently to its fundamentals rather than following the USD Price trail. This shows that USD and crude Oil Prices are rather a relationship than an influencer to each other. Other factors that explain the crude oil prices are global economic growth, OPEC sanctions, geopolitical situations and economic demand and supply indicators.
