Analys
Oil and Dollar – A self-reinforcing feedback loop
There is an intimate relationship between the oil price and the USD. Looking back at the crude oil price and the USD Index since 2013 they are mirror images of each other. We argue that it is not only a one way street from a weaker USD to a nominally higher crude oil price. There is also likely a link from a stronger crude oil price to a weaker USD as well. In addition we also have that OPEC & Co is forcing the oil price higher through their cuts while Donald Trump is promoting a softer USD amid a global economy which is reviving. We are currently in a Merry-go-round circle which is feeding on itself pushing crude prices higher, the USD lower which again is bullish for Emerging Markets which is bullish again for commodity demand,… If the circle is not stopped by verbal intervention from either OPEC & Co on the oil price or ECB on the Eurodollar side then this circle could spiral higher with Brent crude rising another 10% to $77/bl while the USD Index moves back to its 2014 level of 80 points. But both the dollar and crude prices are technically very stretch at the moment and ripe for corrections.
Price action – Higher on a softer USD and bullish WTI on Cushing draw
Yesterday the USD Index fell 1% while the Brent 1mth contract gained 0.8% to $70.53/bl. Brent crude thus actually fell 0.2% in real terms. The dollar was trading lower and lower all through the day. Brent crude also traded in bearish territory most of the day while it normally should have taken a bullish queue from the softer USD. The view that Brent has gone too far already probably weighted on the crude oil price. Brent was trying to move lower while the softening USD Index pulled stronger and stronger in the bullish direction.
Brent crude caved in to bullish push from the weaker dollar when the US inventory data came in at 16:30 CET. It showed that US crude stocks declined 1.1 m bl last week while the market had feared a gain of 4.8 m bl following the indicative numbers from API on Tuesday evening. Great relief. No decline. In addition the crude stocks in Cushing declined a full 3.2 m bl which gave a real boost to WTI crude prices relative to Brent crude. All in all for crude, gasoline and middle distillates there was a rise of 3.6 m bl which is not really all bullish. However, it was clearly bullish for WTI crude prices versus Brent and the whole mood just turned bullish. The Brent bears caved in to the bullish push from WTI and the strong bullish push from the weaker USD and up it went. This morning we have some follow-through as the USD Index declines another 0.2% while Brent trades 0.5% higher at $70.9/bl.
A higher crude oil price is dollar bearish – The feedback loop
A pure 50% devaluation of the USD would obviously lead to a doubling of the nominal crude oil price. The dollar is just a unit of measure. If the yardstick shrinks by 50% then the amount measured will have to double.
There is also another effect in reverse. If the crude oil price increases strongly then it is also dollar bearish and if it falls strongly it is dollar bullish. This is probably why we have such an incredible mirror image of the USD Index and the Brent crude oil price since 2013. The huge drop in the Brent crude oil price from mid-2014 was not driven by a weaker USD but by surplus crude and OPEC moving from a price game to a market share game.
In 2014 the US had a net petroleum import of 5 m bl/d and China imported of 6 m bl/d. Every dollar increase in the crude oil price results in a $4bn increase in the yearly expenditure of USD for China and US crude imports.
From mid-2014 the crude oil price moved from $110/bl to a low of $27/bl in early 2016. That is a decline of 83 dollar per barrel. If this difference sustained for a full year it would have and impact of $333bn. In comparison the US trade deficit is roughly $500bn per year. So the oil price drop equaled a 70% drop in the US trade deficit in terms of magnitude.
When the US spends USD on oil imports it receives crude oil and sends USD into the global market place. First into the pockets of global oil producers like Russia and OPEC. Then these dollars are spent in the global market place by them. A high crude oil price results in a larger flow of dollar from the US into the global market place and is thus dollar bearish. Russia for example will have a good dollar situation when the oil price is high as it receives a lot of USDs. A sharp decline in the oil price leads to less dollar being sent out of the US to global oil producers and into the global market place and is thus dollar bullish.
Most other countries than the US do not have this impact on the dollar cycle because they do not have dollar as their currency. When Europe for example purchases and imports crude oil it has to first buy the dollars in the global market place in exchange for euros. Then it spends the dollar for oil sending them to Russia and OPEC which then sends them back into the global market place when they spend it. Thus Europe’s oil imports are dollar neutral in terms of varying crude oil prices.
China is however a different case than most other countries. It has a dollar surplus to start with due to its trade surplus with the US. Normally this surplus of dollars are recirculated back into the US as China buys US treasuries, different bonds, equities or other US assets. A part of China’s dollar surplus is however spent on its crude oil imports and is thus fed to Russia or OPEC and then into the global market. China does not need to go into the market in the first place to purchase the dollar which it spends on crude oil imports. When the price of crude oil falls sharply then China will spend less of its surplus of dollar on crude oil and instead recirculate it back into the US by purchasing US assets. So a sharply lower oil price means China will feed a significantly lower amount of dollar into the global market place. Due to its dollar surplus and dollar recycling China is not dollar neutral in its crude oil import as Europe is.
The crude oil price has moved higher since early 2016 and sharply higher since June 2017. It has probably had an impact on the USD as it means a larger flow of dollar from the US and from China being fed into the global offshore dollar market via global oil producers like OPEC and Russia. It has relieved a dollar shortage among the world’s oil producers
At the moment there is thus likely a self-reinforcing cycle feeding a higher crude oil price and a softer USD. The USD is of course primed for weakness due to other reasons as well. That is also the case for Brent crude for which OPEC & Co has set the market up for tightness. So crude oil moves higher, the dollar moves lower which again implies a higher nominal crude price. The softer dollar is also EM bullish as it reduces their dollar payment burden of debt. So softer dollar leads to more bullish EM which again means stronger commodity demand and again a higher oil price. That’s a great Merry go round circle!
In the shorter term we are likely set for a correction in the dollar weakening. Verbal intervention from the ECB is probable. That would also likely be a trigger for a correction in Brent crude as it now has the most technically stretched level since 2011.
However, if there really is significant relationship going from the crude oil price to to dollar it means that the current crude oil price revival is now pointing us in the direction of a dollar Index level which we last saw back in 2014 which is another 10% lower at an index level of 80. A 10% softer USD also means a 10% nominally higher crude oil price. The current [oil to dollar] feeding cycle can thus go upwards/downwards to $77/bl for Brent crude oil and to 80 for the dollar index unless OPEC & Co stops the oil rally or the ECB stops the euro appreciation and the dollar weakening.
Chart 1: US dollar and oil – The mirror image
Chart 2: The market is tight as in 2013/14 shown by Brent spot versus Brent 1mth contract
Chart 3: Deliberate OPEC & Co production cuts of 2.1 m bl/d
Sum of cuts not including gains by Libya, Nigeria etc
Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking
Higher last week and today as sanctions bite harder than recession fears. Brent crude gained 2% last week with a close on Friday of USD 73.63/b. It traded in a range of USD 71.8-74.17/b. It traded mostly higher through the week despite sharp, new selloffs in equities along with US consumer expectations falling to lowest level since 2013 (Consumer Conf. Board Expectations.) together with signals of new tariffs from the White House. Ahead this week looms the ”US Liberation Day” on April 2 when the White House will announce major changes in the country’s trade policy. Equity markets are down across the board this morning while Brent crude has traded higher and lower and is currently up 0.5% at USD 74.0/b at the moment.
New US sanctions towards Iran and Venezuela and threats of new sanctions towards Russia. New sanctions on Venezuela and Iran are helping to keep the market tight. Oil production in Venezuela reached 980 kb/d in February following a steady rise from 310 kb/d in mid-2020 while it used to produce 2.3 mb/d up to 2016. Trump last week allowed Chevron to import oil from Venezuela until 27 May. But he also said that any country taking oil or gas from Venezuela after 2 April will face 25% tariffs on any goods exported into the US. Trump is also threatening to sanction Russian oil further if Putin doesn’t move towards a peace solution with Ukraine.
The OPEC+ to meet on Saturday 5 April to decide whether to lift production in May or not. The OPEC+ Joint Ministerial Monitoring Committee will meet on Saturday 5 April to review market conditions, compliance by the members versus their production targets and most importantly decide whether they shall increase production further in May following first production hike in April. We find it highly likely that they will continue to lift production also in May.
OPEC(+) crashed the oil price twice to curb US shale, but it kicked back quickly. OPEC(+) has twice crashed the oil price in an effort to hurt and disable booming US shale oil production. First in 2014/15/16 and then in the spring of 2020. The first later led to the creation of OPEC+ through the Declaration of Cooperation (DoC) in the autumn of 2016. The second was in part driven by Covid-19 as well as a quarrel between Russia and Saudi Arabia over market strategy. But the fundamental reason for that quarrel and the crash in the oil price was US shale oil producers taking more and more market share.
The experience by OPEC+ through both of these two events was that US shale oil quickly kicked back even bigger and better yielding very little for OPEC+ to cheer about.
OPEC+ has harvested an elevated oil price but is left with a large spare capacity. The group has held back large production volumes since Spring 2020. It yielded the group USD 100/b in 2022 (with some help from the war in Ukraine), USD 81/b on average in 2023/24 and USD 75/b so far this year. The group is however left with a large spare capacity with little room to place it back into the market without crashing the price. It needs non-OPEC+ in general and US shale oil especially to yield room for it to re-enter.
A quick crash and painful blow to US shale oil is no longer the strategy. The strategy this time is clearly very different from the previous two times. It is no longer about trying to give US shale oil producers a quick, painful blow in the hope that the sector will stay down for an extended period. It is instead a lengthier process of finding the pain-point of US shale oil players (and other non-OPEC+ producers) through a gradual increase in production by OPEC+ and a gradual decline in the oil price down to the point where non-OPEC+ in general and US liquids production especially will gradually tick lower and yield room to the reentry of OPEC+ spare capacity. It does not look like a plan for a crash and a rush, but instead a tedious process where OPEC+ will gradually force its volumes back into the market.
Where is the price pain-point for US shale oil players? The Brent crude oil price dropped from USD 84/b over the year to September last year to USD 74/b on average since 1 September. The values for US WTI were USD 79/b and USD 71/b respectively. A drop of USD 9/b for both crudes. There has however been no visible reaction in the US drilling rig count following the USD 9/b fall. The US drilling rig count has stayed unchanged at around 480 rigs since mid-2024 with the latest count at 484 operating rigs. While US liquids production growth is slowing, it is still set to grow by 580 kb/d in 2025 and 445 kb/d in 2026 (US EIA).
US shale oil average cost-break-even at sub USD 50/b (BNEF). Industry says it is USD 65/b. BNEF last autumn estimated that all US shale oil production fields had a cost-break-even below USD 60/b with a volume weighted average just below USD 50/b while conventional US onshore oil had a break-even of USD 65/b. A recent US Dallas Fed report which surveyed US oil producers did however yield a response that the US oil industry on average needed USD 65/b to break even. That is more than USD 15/b higher than the volume weighted average of the BNEF estimates.
The WTI 13-to-24-month strip is at USD 64/b. Probably the part of the curve controlling activity. As such it needs to move lower to curb US shale oil activity. The WTI price is currently at USD 69.7/b. But the US shale oil industry today works on a ”12-month drilling first, then fracking after” production cycle. When it considers whether to drill more or less or not, it is typically on a deferred 12-month forward price basis. The average WTI price for months 13 to 24 is today USD 64/b. The price signal from this part of the curve is thus already down at the pain-point highlighted by the US shale oil industry. In order to yield zero growth and possibly contraction in US shale oil production, this part of the curve needs to move below that point.
The real pain-point is where we’ll see US drilling rig count starting to decline. We still don’t know whether the actual average pain-point is around USD 50/b as BNEF estimate it is or whether it is closer to USD 65/b which the US shale oil bosses say it is. The actual pain-point is where we’ll see further decline in US drilling rig count. And there has been no visible change in the rig count since mid-2024. The WTI 13-to-24-month prices need to fall further to reveal where the US shale oil industry’ actual pain-point is. And then a little bit more in order to slow production growth further and likely into some decline to make room for reactivation of OPEC+ spare capacity.
The WTI forward price curve. The average of 13 to 24 month is now USD 64.3/b.
The average 13-to-24-month prices on the WTI price curve going back to primo January 2022. Recently dropping below USD 65/b for some extended period.
Brent has defied bearish equities for three days but is losing its stamina today. Brent gained 0.3% yesterday with a close of USD 74.03/b, the highest close since 27 February and almost at the high of the day. It traded as low as USD 73.23/b. Brent has now defied the equity selloff three days in a row by instead ticking steadily higher. A sign of current spot tightness. This morning however it is losing some of its stamina and is down 0.5% at USD 73.7/b along with negative equities and yet higher gold prices.
The new US Iran sanctions is creating frictions in getting its oil to market and helps keeping oil market tight. Part of the current tightness is due to the new US sanctions on Iran which. Ships containing 17 mb of its oil now sits idle east of Malaysia waiting (Bloomberg) for ship-to-ship transfers with China teapot refineries the normal final destination. But the latest US sanctions has probably made these refineries much more cautious. More friction before Iranian oil is reaching its final destination if at all. Tighter market.
Lower Saudi OSPs for May is expected. A signal of a softer market ahead as OPEC+ lifts production. Saudi Aramco is expected to reduce it official selling price (OSPs) for Arab Light to Asia for May deliveries by USD 2/b. A measure to make its oil more competitive in relative to other crudes suppliers. It is also a sign of a softer market ahead. Naturally so since OPEC+ is set to lift production in April and also most likely in May. If Saudi Aramco reduces its OSPs to Asia for May across its segments of crudes, then it is a signal it is expecting softer oil market conditions. But news today is only discussing Arab Light while the main tightness int the market today is centered around medium sour crude segment. A lowering of the OSPs for the heavier and more sour grades will thus be a more forceful bearish signal.
Front-end backwardation may ease as the Brent May contract rolls off early next week. The Brent May future will roll off early next week. It will be interesting to see how that affects the front-end 1-3mth backwardation as it is shifted out into summer where a softer market is expected.
Brent is boring like crazy with 30dma annualized volatility of just 21%. Waiting for something to happen.
Brent crude has defied three days of bearish equity markets and ticked higher instead. Caving in a bit this morning with yet another day of bearish equities and bullish gold.
Last week, U.S. crude oil refinery inputs averaged 15.8 million barrels per day, an increase of 87k bl/day from the previous week. Refineries operated at 87% of their total operable capacity during the period. Gasoline production declined, averaging 9.2 million barrels per day (m bl/d), while distillate (diesel) production also edged lower to 4.5 m bl/d.
U.S. crude oil imports averaged 6.2 m bl/d, up 810k barrels from the prior week. Over the past four weeks, imports have averaged 5.7 m bl/d, representing an 11% YoY decline compared to the same period last year.
Where we place most of our attention – and what continues to influence short-term price dynamics in both WTI and Brent crude – remains U.S. crude and product inventories. Total commercial petroleum inventories (excl. SPR) rose by 3.2 m bl, a relatively modest build that is unlikely to trigger major price reactions. Brent crude traded at around USD 73.9 per barrel when the data was released yesterday afternoon (16:30 CEST) and has since slid by USD 0.4/bl to USD 73.5/bl this morning, still among the highest price levels seen in March 2025.
Commercial crude oil inventories (excl. SPR) fell by 3.3 m bl, contrasting with last week’s build and offering some price support, though the draw was less severe than the API’s reported -4.6 m bl. Crude inventories now stand at 433.6 m bl, about 5% below the five-year average for this time of year. Gasoline inventories declined by 1.4 m bl (API: -3.3 m bl), though they remain 2% above the five-year average. Diesel inventories fell by 0.4 m bl (API: -1.3 m bl), leaving them 7% below seasonal norms.
Over the past four weeks, total products supplied – a proxy for U.S. demand – averaged 20.2 m bl/d, up 0.5% compared to the same period last year. Gasoline supplied averaged 8.9 m bl/d, down 0.2%, while diesel supplied came in at 3.9 m bl/d, up 1.8%. Jet fuel demand also showed strength, rising 3.9% over the same four-week period.
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