Many countries, peg the price of crude oil in U.S. dollars [USD]. This makes sense as the currency of many countries is tied to the greenback including trading partners in this hemisphere all the way to China. Crude oil can be pumped from many U.S. and U.S. associated sources ranging from Alaska, the North Sea and the Gulf of Mexico, to Oklahoma and good old Texas crude. As we all know only too well, oil also is derived from less stable regions such as West Africa, the Caspian Sea, to the Middle East and Venezuela. Wherever it’s extracted, much of the world’s resources are in “U.S. dollar-quoted crude.”
This year, price increases in crude oil have been reported in the press as being on a rocket, heading mostly up due to global demand, and unstable geopolitical conditions. Competition for oil amongst economies is so great that governments have interceded adding another layer of complexity in exploration, environmental impact and M&A activity. This is all further complicated by currency exchange rate volatility between the U.S. and its trading partners. U.S. housing and credit market turmoil have cultivated a macroeconomic climate which has led to the rapid depreciation of the U.S. dollar. The greenback recently hit a 31-year low with the Canadian dollar [CSD], and its gap with the Euro (XEU) is now upwards of 40%.
Since late August of this year, U.S. dollar-quoted crude has risen swiftly in relation to XEU- and CAD-quoted oil. Looking over the past five-year period, the current gaps in relative crude prices is at their greatest as seen in the chart below. In April of 2003, oil prices grew at roughly equivalent rates among the three currencies, and in May of 2005, prices again rose in comparative lockstep. Price disparities began to rapidly widen in June of this year, and were significantly amplified in late August, as U.S. economic tumult began to manifest itself on the dollar.
Current trends encompassing simultaneous increases in energy prices, and a falling U.S. dollar do not bode well for the U.S. economy as it is trying to avert a slowdown. Even with exports and incoming tourists, consumers and businesses collective demand for oil is fundamental to U.S. economic health.
Speculators, geopolitical instability, and the vagaries of inventory levels at the Nymex, be additive forces resulting in even higher prices of global crude, and what may be worse for the U.S. economy would be for the U.S. dollar continue to move inversely.
Disclosure: Mr. Corn does not invest directly in commodities.