From the statistical data, there is a strong negative correlation between WTI light crude oil price and US dollar index. Monthly statistics show that the correlation coefficient between WTI light crude oil price and US dollar index is negative 0.82. What is the mechanism of this negative correlation? Is it because the depreciation of the US dollar leads to an increase in global demand for crude oil, which in turn leads to an increase in prices? Or will the rise in the dollar price of crude oil devalue the dollar?
To analyze this problem, it is necessary to analyze the influence of crude oil producing countries and consuming countries on the fluctuation of US dollar exchange rate. Of course, this analysis is definitely not comprehensive. After all, as a commodity, crude oil is not only affected by the fundamentals of the global economy, but also the huge financial markets such as crude oil futures trading will respond to the spot price of crude oil.
International crude oil transactions are denominated in dollars, while consumers in various countries buy crude oil products in their own currencies. Crude oil producing countries sell oil to get dollars, and buy goods and services from other countries in other currencies. For OPEC members, this situation is even more serious, and the impact of dollar depreciation varies from country to country. International crude oil companies sell their crude oil products in dollars and pay wages, benefits, taxes and other expenses in local currency. When the dollar depreciates, countries that appreciate relative to the dollar can buy cheap crude oil, while countries linked to the dollar cannot benefit from crude oil imports.
Theoretically, the impact of the depreciation of the dollar on crude oil producing countries is: reducing the purchasing power of these countries and pushing up the domestic inflation level, while the demand for crude oil will increase in countries with a relative appreciation of the dollar. Another microscopic observation is that the depreciation of the dollar will greatly increase the demand for gasoline in the United States, because many people who plan to travel to Europe will choose to stay at home. Due to the extremely heavy tax rate of crude oil in European countries, roughly speaking, European countries can't get much benefit from the decline in crude oil prices.
Crude oil is mainly used in transportation, industry, family and commerce, and power generation. The consumption of crude oil for transportation in the United States accounts for 72%, while China is the fastest growing automobile market in the world. There will be no large-scale alternative fuels in the short term. The demand for crude oil in China will continue to rise, and the rise and fall of crude oil prices will have a great impact on China and the United States.
Generally speaking, the depreciation of the dollar will contribute to the rise of crude oil prices in three aspects:
First, the depreciation of the dollar will reduce the purchasing power of crude oil producers or exporters. The price of crude oil is set in US dollars. Crude oil producing countries sell crude oil to obtain US dollars, and then convert the US dollars into other countries' currencies to buy goods from other countries in the world. Due to the depreciation of the dollar, the purchasing power of crude oil producing countries has declined. From this perspective, producing countries need to raise prices to make up for the loss of purchasing power.
Second, the depreciation of the dollar will increase the purchasing power of some oil buyers such as Europe and Japan, because the price of crude oil denominated in euros and yen becomes relatively cheap; However, the depreciation of the US dollar has no effect on the purchasing power of crude oil in countries linked to the US dollar exchange rate. Therefore, from the perspective of the global market, the depreciation of the US dollar will boost the global demand for crude oil;
Third, the depreciation of the dollar itself corresponds to the improvement of the global economy, especially the rapid development of emerging markets in the past 10 years, and the demand for crude oil is in a strong state, so it is necessary for crude oil prices to rise.
On the other hand, with the rise of the dollar price of crude oil, oil exporting countries have more dollars, and when buying goods or services from other countries, they need to convert them into the currencies of other countries, such as euros and Japanese yen, which is also a boost to the currencies of other countries and will further promote the depreciation of the dollar. The key that this state will not last forever is that other factors will prevent the dollar from depreciating first. For example, if the United States continues to raise interest rates to curb inflation, it will widen the spread with other currencies, attract the currency to return, strengthen the dollar, or the global crisis breaks out and investors' risk aversion warms up, thus choosing dollars or dollar assets to hedge. The occurrence of this situation will interrupt the trend of crude oil price increase and dollar depreciation.
Other factors leading to the sharp rise and fall of oil prices: Looking back at all stages of the world oil market since the establishment of the Organization of Petroleum Exporting Countries in the 1970s, the sharp turn of oil prices is often triggered by war, weather or political events, which is also an important reason why oil prices are confusing and unpredictable.
The first sudden factor that led to the rise in oil prices was war. Comparing the Iran-Iraq War in the late 1970s with the Gulf War in the early 1990s, the latter led to a sharp rise in oil prices in a short period of time, but then the Organization of Petroleum Exporting Countries (OPEC) increased production substantially to make up for the gap of 3 million barrels per day in the oil market after Iraq suffered economic sanctions, which shows that OPEC played a decisive role in international oil prices.
The second factor is the intensification of the contradiction between supply and demand. The fundamental factor of high oil prices in 2003-2004 was the overall growth of the world economy, especially in China, Indian and Russian countries. Although the situation in Iraq, strikes in Venezuela and Nigeria, natural disasters such as hurricanes and the decline in reserve capacity of oil-producing countries all have an impact on the rise of oil prices, this is only a short-term pulse in the long-term upward channel of oil prices, and the main reason is still the change of oil supply from overall oversupply to shortage in the past 10 year. However, after the "9.11"incident on May 38, 2006, the downturn in aviation, transportation and tourism led to a drop in oil prices, which negatively reflected the impact of the economy on oil prices.
Finally, the cost factor can not be ignored. On the medium-term time scale, the global upstream oil and gas cost plus appropriate profit rate is the support line of oil price. However, from a longer-term perspective, it will be more and more difficult to exploit new oil fields and the cost will gradually rise, which determines that oil prices will be bullish for a long time from the cost side.