How Does the Weak Dollar Affect Oil Prices?

According to energy analyst Vandana Hari, the weak US dollar is currently bolstering oil prices and preventing the industry from slipping into a downward spiral. “As far as fundamentals are concerned, there is really not much to move oil around either way, which is why we have seen it pretty range-bound but within that, continuing to grind higher because of a weaker dollar,” says Hari, founder of global energy consultancy group, Vanda Insights. “That’s the only support, I would say.”

Thanks to the weak US dollar, Hari and other analysts predict oil prices will continue to creep upwards. This marks a significant shift from the energy landscape in March, which saw US crude futures contracts plummet by more than 100% and slip into negative territory for the first time in history.

Weak dollar and US incentives to “prop up oil”

Prices rebounded in May and June, spurred by the reopening of major economies and the easing of lockdowns. While demand has continued to fall in oil-thirsty countries such as India, Hari says the weakened value of the US dollar will lift crude prices in the last quarter of 2020 and beyond.

President Trump has pledged “to keep the U.S. stock markets buoyant” which will also help stabilise oil prices and prevent the industry from another crash. Referring to fiscal stimulus packages and financial support incentives, Hari says “These measures will keep risk-on trade, it will keep sentiment quite buoyant in larger global financial markets. To some extent, I think it will support sentiment in oil, it will prop up oil.”

Investors covet risk assets

Australian analysts agree, with BetaShares chief investment officer Louis Crous asserting the weakened US dollar has triggered a shift towards risk assets. As a result, this has boosted oil prices. “It (the policy shift) really cements the fact that you’re looking at negative real rates for the US, which will not be great for the US dollar,” says Crous. “That’s good for commodities.”

Of course, the landscape is volatile and even the smallest changes can send shockwaves through the commodities industry. Just days ago, WTI was hit with the biggest single-day decline in two weeks, with prices falling by up to 6%. The slump was triggered by new lockdowns in Europe and a resurgence of cases in the US. Failure to launch a much-anticipated US fiscal stimulus package also kept oil prices from climbing, though this trend could reverse if and when the government assistance is approved.

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