Rising Crude Oil Is Driving the Dollar Down

There are two driving seasons in America now and they both involve oil. We are currently in the midst of the traditional driving season where Americans take to their vehicles for two weeks or more to get away from the stresses and strains of life. The second season is not so familiar but comes around now and again. It has been speeding along the interstate for 5 years now and it is the dollar-driving season. However, during this season, the driving is all downhill.

Why does this dismal season involve oil? As any gold and dollar watcher will know, the US Dollar index has been flirting with its long-term support level of 80 again. Some think it will hold as in former times. Like Samson in the Bible the dollar bulls will rise up and say, “I will go out as at other times before, and shake myself.” But they wist not that they have received a nasty little trade deficit haircut and they will get their collective eyes put out.

But who will be the Delilah that gets the better of the Samson Dollar? The answer in part is crude oil. For example, the monthly US trade deficit in May rose 2.3% to $60 billion. Of the $192 billion dollars of imports that fuelled this, the continuing rise in the price of oil constituted $19 billion of this or just over 10%.

To put it bluntly like George Bush, 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 there is one thing that will ensure the US Dollar will plunge below its long-term support level, it will be oil. Only two things need to happen to ensure this. The first is continued demand for this product that America so craves. The second is for the price to keep on rising. Take a look at this long-term chart of the US Dollar Index (black) and the price of crude oil (red).

click to enlarge

The dollar and oil tend to move in opposite directions. This is partly to be expected if the price of oil is in US dollars. If dollars depreciate then commodities priced in dollars will tend to rise. However, that doesn’t begin to explain it all. The dollar has dropped 33% in value since 2002 but oil has not increased by 33%, but rather has almost quadrupled in price as oil gets more expensive to extract and China leads explosive Asian demand.

So, the first condition that Americans will continue to demand oil looks like a certainty with demand up in 2006 and so far in 2007. But will the price of oil continue to rise? The chart suggests we are in for one more surge in oil prices before an extended break. Elliott Wave analysis draws out a nice dollar bull impulse wave that began at $11 in 1998. We are now in the final wave 5 which will be confirmed when crude oil breaks above its previous high of $78 a year ago. Western Texas crude oil closed at $78.18 this Tuesday.

We expect crude oil to test if not break $100 to trigger panic buying of gold and silver in a final blow off that will do very well for holders of these timeless stores of real value.

Comments

[Greg Pinelli:]

The chart used to illustrate an inverse relationship between oil and the dollar only holds for the latest period..Jan 2003 to today. The real relationship between dollar depreciation exists between dollar supply and value..and that most certainly isn't an inverse one. The US uses more oil because it can afford more oil..it seems to me that if any behavior illoustrates true addiction by a people it is in Iran......their "fix" was rationed and the cost of gasoline raised and they had a cold turkey fit.
Gold and silver may well go up...but not until the final towel is thrown in by the Fed and rates are dropped to accomodate credit losses/fears. $100 oil without this credit sop will only create strong recessionary conditions and gold/silver won't go anywhere but down.
Gold is MONEY...period...and people will have to mistrust the paper stuff more than they do for $1000 gold or $50 silver to show their faces.

2007 Aug 02 01:43 AM

[Living Off ...:]

Interesting theory, but I don't think the Dollar and Oil prices are necessarily correlated. The US imports EVERYTHING, from toothpaste for inmates, petfood and anything that you use on a daily basis. The US is producing NOTHING and sending all its Dollars abroad instead.

So, I think the reason why the dollar is dropping because governments all over the world are hold way too many dollars and are now diversifying out of it - Basically they're becoming net sellers.

Japan and China have somthing like $2 trillion USD between them. WTF are they going to do with all that? With no end to the trade deficit in sight, there doesn't seem to be any way to unwind it. Its the selling of these dollars that is pushing pressure on value of USD.

2007 Aug 02 01:04 PM

[omodes123:]

and thus the rise in oil prices. the author has it backwards... it's the falling dollar which is causing higher oil prices. not the other way around. reserves simply don't justify the cost right now.

2007 Aug 03 04:39 AM

[t.sam.thomas:]

ethanol based fuel becoming a reality in the near future i think the demand for oil is going to take downturn and the prices wont go up.

2007 Aug 03 04:54 AM

[Living Off ...:]

ethonal will not take over oil in the US. corn is just too expensive. it was a foolish idea to begin with. Now food costs are increasing and so is oil. demand for oil is increasing every day in india and china. they will keep the price high and maybe it will go to $200/barrel in the next 5 years.

offering subsidises for solar power would've been smarter. but farmers have bigger lobbies than solar panel companies.

even subsidizes on fuel efficient vehicles would help reduce our dependence on foreign oil. The US has the worst fuel efficiency of any country.

2007 Aug 03 01:23 PM