Oil prices and the U.S. dollar are rallying in tandema dynamic that has only occurred 11 times since 1983, and its drawing the attention of market participants attempting to assess its significance.
West Texas Intermediate crude oil traded on the New York Mercantile Exchange
which is up 12.2% in the past month, according to FactSet data, has shaken off a 3.6% rally in the previously battered dollar, as measured by the ICE U.S. Dollar Index
according to FactSet data. Check out the recent chart below depicting the dollar gauges move and WTIs climbs from Bespoke Investment Group:
Source: Bespoke Investment Group
The coordinated run-up is rare because a stronger dollar makes commodities priced in the currency more expensive to users of other currencies. So a stronger dollar tends to be a headwind for commodity prices.
Bespoke put the odd turn in the dollar-oil relationship this way in a May 7 note:
The most surprising aspect of the rally in crude oil prices is that the most recent leg higher has come as the dollar has rallied along with it. Historically, crude oil prices have had an inverse correlation to the dollar and looking at the chart above, it is pretty easy to see that the rally in crude oil prices over the last year has mostly coincided with a decline in the dollar. Over the last four weeks, though, the US Dollar Index has seen a pretty sizable bounce of over 3%, but rather than stop the rally in its tracks, crude oil has been unfazed, gaining an additional 10%+.
The Bespoke analysts added:
|Just to put into context how uncommon the simultaneous rallies in the US Dollar Index and WTI are, the current period represents only the 11th time since 1983 that crude oil rallied more than 10% during the same four-week stretch that the US Dollar Index gained more than 3%|
The dollar index, after slumping nearly 10% in 2017 and starting off 2018 with further weakness, has been on the rebound, hitting a string of four-month highs. In part, thats due to expectations the Federal Reserve is unflinchingly on track to deliver at least two, if not three, more rate increases in 2018. Higher rates can make the buck more attractive to investors looking to park money. The dollar gauge remains off 6.5% over the past 12 months, to be sure.
See: How much juice is left in the dollar rally?
Meanwhile, crude has rallied as production curbs instituted by the Organization of the Petroleum Exporting Countries and other major oil producers appears to have achieved the desired goal of absorbing a glut of crude that helped crush prices of both international benchmark Brent oil
trading on the ICE exchanged and U.S. listed WTI back in 2014
Read: Why the unloved energy sector is primed for success
Anticipation of supply disruptions likely to ensue following President Donald Trumps announcement on Tuesday that the U.S. is exiting the multilateral Iran nuclear pact also played a part in lifting crude futures.
Check out: Oil prices have surged above $70here are 4 key reasons behind the rally
In a research note on Wednesday, Jeffrey Saut, chief investment strategist at Raymond James, said while the simultaneous rally is rare, it isnt unprecedented.
Saut said Raymond James remained upbeat on the outlook for commodities overall, particularly energy-related stocks, which he argued have been underinvested and underloved.
Indeed, the energy sector, as measured by the S&P 500s
has rallied 12.1% over the past month, registering the best 30-day performance among the indexs 11 sectors, compared with a 2.6% rise for the S&P 500 over the same period, a 1.7% gain for the Dow Jones Industrial Average
in the past month and a 4.8% gain for the Nasdaq Composite Index
That outperformance for energy comes after it was the worst performer in 2017, off by 3.8%, and had the weakest return in the first three months of year, down by about 6.6%.
Read: These energy stocks stand to benefit from U.S. shales bestand worstdays
Others, however, have questioned the significance of the correlation:
Heres another perspective. CC @aeberman12 pic.twitter.com/onxvQLl9nM
— j aron (@JAronAndCo) May 7, 2018
Nicholas Colas, co-founder of DataTrek Research, said that the tandem march higher by the buck and crude might not last because it has been pegged in large part on bets the U.S. would reintroduce sanctions on Iran.
The divergence between oil and the dollar seems to have been related to the Iran deal. Now that we know what is happening there, well see if the usual historical relationship reasserts itself, he said.
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