Saturday, 04 April 2015 10:38

How Crude Oil Gains on Fall in USD

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Let see how Crude oil prices and USD are correlated. We all know that investment in commodities during weak USD is nothing but hedging against currency risk which ultimately leads to hike in commodity prices. There are also other fundamentals that raise commodity prices.

Let take an example. U.S. is the largest crude oil buyer and OPEC countries are among top suppliers. USD is globally traded currency and is stronger than Arabian currencies. If USD depreciates other currencies value go up.

Suppose that U.S. is importing from U.A.E. Now 1 USD is equal to 3.67 dirham. If dollar depreciates heavily dirham may fall to 3.2 or below 3. Now during this time exporters will get less money compare to what they were getting when dollar was strong. If dollar keeps falling or remains weak profit margins of exporters will keep getting narrower.

Low earnings may not allow producers to go for expansion. At certain point of time they would prefer to produce less to limit their expenditures. It may create supply shortage in the market that will finally increase demand for oil.

Now we can easily understand that crude oil prices rise with fall in USD.


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