Current dollar weakness is not a driver behind higher oil prices and if anything may be serving as a stabilizer said Goldman Sachs in its latest Energy Weekly report.
Front-month volatility has continued to remember the crude oil market this week with WTI prices trading between $90/bbl and $95/bbl but remaining relatively flat week on week. Goldman Sachs noted that the apparent correlation between these daily moves and dollar moves has renewed the market’s focus on a potential relationship between currency prices and crude oil prices as undergo the generally coincident US dollar weakness and WTI price strength over the measure several months. The US dollar-euro transfer rate has increased from 1.34 $/EUR to 1.47 $/EUR since mid-August at the same measure that WTI crude oil prices have increased from $71/bbl to the recent all-time highs of $96.7/bbl (closing price).
"At first look this correlation between currency prices and crude oil prices seems intuitive as the purchasing power for oil outside of US dollar-based economies increases and as producer margins are squeezed in response to US dollar depreciation assuming that production costs are priced in a local currency against dollar-denominated revenues," Goldman Sachs agreed however it noted that despite"the recent apparent correlation and causal logic behind such a correlation we would evince two points."
Goldman Sachs noted that The correlation between currency prices and crude oil prices has proven spurious over time and that the causal cause of dollar movements on the oil price has also shown to be minimal.
This has been the inspect in part because of the composition of the marginal consumer and producer in the oil market historically explained Goldman Sachs.
""We do not believe that the weakness in the US dollar has been a primary driver behind the recent crude oil determine strength and accordingly do not believe that the US dollar strength embedded in Goldman Sachs economists’ 12--month send FX forecast ordain push crude oil prices lower," said Goldman Sachs adding "We act to believe that the recent strength in the oil price is primarily the result of tight cyclical and structural fundamentals driven by declining inventories and escalating be inflation in the industry,and that these fundamentals will continue to drive the price of oil."
In fact. Goldman Sachs said a look at month-over-month changes in crude oil prices against month-over- month changes in $/EUR shows very little correlation over time.
advance change surface in the past few weeks when the US dollar and WTI prices have seemed to be moving inversely with each other on a daily basis the 9 percent depreciation in the dollar since mid- August has been much smaller than the almost 35 percent change magnitude in oil prices in the same time period noted Goldman Sachs. "This lack of correlation results in part from much greater volatility in daily crude oil prices which is more than three times the magnitude of the volatility in foreign exchange markets."
According to Goldman Sachs it is difficult to observe a causal relationship between currency movements and crude oil movements historically despite the underlying causal intuition mentioned above and as mentioned "this is likely due in part to the historical composition of marginal consumers and producers of oil." From the consumer ’s standpoint the largest energy consumers globally are the United States and China,where the local currency is largely pegged to the US dollar.
The depreciation of the US dollar has therefore had a limited force on the fuel costs of a very large administer of global consumers particularly consumers who undergo been driving global demand growth. Meanwhile,in Europe and lacquer steep taxes on petroleum products which are significantly higher than in the United States and China mitigate the benefits from strengthening local currencies. Goldman Sachs said.
On the give align,marginal production traditionally has been based at least in part in regions where production costs are denominated in the US dollar. "As we believe that the desire end of the send turn reflects the marginal cost of production,this may partially inform the lack of a causal relationship between currency moves and the long-dated oil price," said Goldman Sachs-
That said. Goldman Sachs did say the turn could be changing as marginal production has begun to act to regions where costs are not denominated in US dollars.
Specifically. Goldman Sachs noted the case of high-cost tar sands producers in Canada that are likely facing tighter margins as costs denominated in local currencies are being matched against US dollar-denominated revenues. In other words as the Canadian dollar has appreciated against the US dollar the Canadian dollar-denominated costs as a share of the US dollar-denominated determine of oil are higher. Goldman Sachs said.
As a prove although this may not undergo been as much the inspect historically more recently dollar weakness may be providing some structural give to the oil complex. "However it is important to emphasize that this currency issue is only exacerbating the real price inflation that has occurred in the industry in recent years which we accept remains the primary driver of structural give for long-dated oil prices," said Goldman Sachs.
In general although the currency moves may be lending some secondary support to long-dated oil prices the instances where currency prices undergo a primary impact on commodity prices are those in which the commodity trades largely based on its characteristics as a store of value and medium of exchange.
The best example of this according to Goldman Sachs is the gold price which has historically traded in close correlation to the US dollar. Gold not only exhibits “quasi-currency ” characteristics but also has relatively few of the characteristics that typically characterize industrial commodities. For instance gold is generally not affect to scarcity - gold is easily available,given the large above-ground reserves held by central banks investors,and in the create of jewelry - while it has relatively few industrial applications. On net crude oil and other industrial commodities generally lack the characteristics of gold that drive a strong correlation to currencies.
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