MyValueResearch

Relation between Crude and Dollar

Crude oil
Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world’s primary energy consumption.  Almost all industries including agriculture are dependent on oil in one way or other.

Types of Crude Oil
Crude oils vary widely in appearance and viscosity from field to field. They range in colour, odour, and in the properties they contain. 

Brent Crude is one of the major classifications of oil consisting of Brent Crude, Brent Sweet Light Crude, Oseberg and Forties. It is sourced from the North Sea. It contains approximately 0.37% of sulphur. The symbol for Brent crude is SC. One contract equals 1,000 barrels (160 m³). Contracts are quoted in U.S. dollars, therefore each tick lost or gained equals $10.

Sweet crude oil is a type of petroleum. Petroleum is considered “sweet” if it contains less than 0.5% sulfur. Light sweet crude oil” is the most sought-after version of crude oil as it contains a disproportionately large amount of these fractions that are used to process gasoline, kerosene, and high-quality diesel.

West Texas Intermediate (WTI), also known as Texas Light Sweet, is a type of crude oil used as a benchmark in oil pricing and the underlying commodity of New York Mercantile Exchange’s oil futures contracts. Its API gravity is 39.6 degrees. WTI is generally priced at about a $5 to $6 per-barrel premium to the OPEC Basket price and about $1 to $2 per-barrel premium to Brent, although on a daily basis the pricing relationships between these can vary greatly.

Relationship between Crude Oil and Dollar

Crude Oil and the Dollar are two of the most closely watched variables in the financial world, and they’re increasingly heading in opposite directions. But which one is impacting the other is a matter of growing debate.

The much larger structural story of the oil price rise is demand from emerging markets such as China in recent months has resulted in Dollar depreciation which in turn pushed up crude to all-time highs. Moreover America is addicted to Oil. With 5% of the world’s population, the United States consumes 25% of all global Oil production. No nation is so dependent on Oil like the USA. If the Consumption increases then it is sure for Oil price to hike.

In the present Commodity market scenario one cannot stop thinking that there is a direct or inverse relation between the two. Though Oil is produced in dozens of countries around the world, but its standard trading unit is in dollars per barrel. So, people who want to buy more oil would need to pay more dollars, thereby bidding up both.   But the important point to remember is that Dollar devaluation affects oil prices directly in the short run and indirectly in the long run but in both cases the oil price hikes.

As foreigners bid up the price of oil and other dollar-denominated commodities, the price of crude oil and other commodities rise in dollar terms as the dollar falls in value against other currencies.

Furthermore, Dollar depreciation reduces the ability of the Oil producing countries and the Oil companies to invest in additional capacity, which result in cut in supply and increases domestic inflation and in return it lower the amount of funds available for investment in the Oil sector.

Lower interest rates usually weigh on a country’s currency, because they erode the return on assets denominated in the currency. The dollar is in a continuous cycle of decline as it lost a quarter of its value against the Euro over the past two years. On Sept. 18, the central bank cut its federal funds rate by half a percentage point, and then followed it up with a quarter-point cut at the end of last month, bringing the benchmark to 4.5%. Since then, the dollar has plunged while Oil prices soared.
Lastly, decline in US Motor Gasoline inventories ahead of summer driving season with falling refinery utilization rate is also supporting the historic high of Crude Oil. However, the rally is mostly influenced by depreciation of USD, which makes dollar denominated assets cheaper for importing countries. This resulted into increased buying in Crude; also fueling the rally is the investment demand flowing across the commodities segment.

These opposite trends are the result of attempts by investors and speculators to escape the effects of inflation and the declining dollar by resorting to oil and gold. By doing so and pumping billions of dollars out of the stock market, they are effectively weakening these markets while at the same time pushing the prices of oil, gold and commodities upwards at a rate that far exceeds the equilibrium between the demand and supply of these commodities.