Tuesday, January 20, 2015

Every Time Oil Goes Down So Does The U.S. Dollar

I think it should not be a surprise that every time oil prices fall, some time after that the U.S. dollar follows oil. In my opinion this is just a simple play between supply and demand.

Why? Well, oil is a world commodity. If you want to buy it you have to have the U.S. dollars. When the price of oil drops you need less dollars then before. Let me do some basic math: since June 2014 the oil prices had dropped around $60 per barrel. The world demand is around 90 million barrels a day so it means that today the world daily needs are $5.4 billion  lower than just six months ago. On a yearly basis it is around $2 trillions. As you see, the demand for the U.S. dollars should be much lower due to lower oil prices. In effect, the dollar should go down some time after oil prices had fallen.

Let us check it on the chart:

Yellow ranges show the time span between the beginnings of the major oil prices corrections and the beginnings of the dollar downturns.

As you see, generally it had been taking 7 to 20 months since the beginning of the oil prices correction to the start of the dollar downturn. I think that due to the fact that more and more countries try to buy oil using other currencies than dollars, the U.S. currency should correct faster than before. Today we are in the seventh month of the oil bear market so expect the falling dollar any time soon.

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