There is a history between the U.S. Dollar and the price of oil. In the past, they used to have an inverse relationship. That is to say as oil went higher, the U.S. Dollar would fall and vice versa. This was because of two main reasons:

  1. The price of a barrel of oil is priced in U.S. Dollars. When the dollar is strong, you need fewer dollars to purchase oil. When it is weaker you need more.
  2. In the past, the United States was a net importer of oil.

The first point still holds true to this day, but the second one is no longer the case. Fracking technology and other advancements in the industry have allowed the United States to increase its energy independence over the years.

Interestingly, in 2011, the United States became a net exporter of petroleum products. In fact, the United States even overtook both Saudi Arabia and Russia in our production of crude oil! Check out the chart below of the top oil-producing countries in 2021:

The breakthrough of fracking has disrupted oil markets and has made it interesting to see the changes in the relationship between the U.S. Dollar and oil prices.

Higher oil prices are actually a net benefit to the U.S. trade deficit these days as the country is now a net exporter of petroleum products. It is no longer the case that high oil prices are a pinch on the budget in the United States like they once were.

The historically inverse relationship between the U.S. Dollar and crude oil prices is now not so locked in. Check out this overlay of the U.S. Dollar Index (DXY) and oil prices:

This has been pronounced, as you can see in this chart of the six-month rolling correlation coefficient between the DXY and oil prices — which has moved from net negative correlation to a much more unstable correlation.

It wouldn’t be shocking to see the relationship between the two completely change in the future. In fact, some anticipate that the inverse relationship may completely flip. It is entirely possible that there will be a direct correlation between the U.S. Dollar and oil prices in the future. The U.S. now has significant influence over the price of oil globally. Given the rising production levels in the United States, it is now in a stronger position than it used to be as far as the oil markets are concerned.

Traders should position themselves in a way where they aren’t relying on the historical inverse relationship between oil and the U.S. Dollar. That is just the old way of looking at things, and it is not nearly as valid as it once was.