What remains constant?
The oil pricing depends on the strength of the US Dollar in different parts of the world. Hence, the stronger the US Dollar’s value, the fewer US Dollars you need to purchase a barrel. On the other hand, the weaker the US Dollar’s worth, the more US Dollars you need to buy a barrel of oil.
What changed?
The oil’s and US Dollar’s prices are inversely related. The premise that we mentioned earlier is one thing that can explain that. The following premise we are about to learn used to be an explanation as well, but not anymore.
The US has always been an oil net importer. When the price of oil increases, the trade balance deficit of the US increases as well because there is a need to send more dollars to other countries. This is not a premise that can explain the inverse relationship between oil and the USD because of horizontal drilling and fracking technology. The US shale revolution made a massive increase in the production of domestic petroleum.
Furthermore, the US that used to be a net importer is now a net exporter. Back in 2011, the US started to export refined petroleum products. Today, they are now the largest crude oil produce — surpassing Saudi Arabia, which was always known as a massive crude oil producer.
The US, their oil, and the inverse relationship
We said that the relationship between the oil’s price and the USD’s price has always been inversely related. However, that fact has now become a thing of the past. As the US oil exports increase, the oil imports decrease. So, it makes sense that oil’s price does not help the US get a higher deficit. Instead, it even helps in reducing it.
We mentioned fracking a while ago. Fracking is when you inject a liquid subjected to high pressure into subterranean rocks, boreholes, and the like. Later on, an existing fissure forcibly opens, and oil or gas gets extracted. Fracking is a significant cause of the disrupted norm in the oil market. The Energy Information and Administration said that the US is 90% self-sufficient already in terms of energy consumption. Can you imagine that?
Will the US Dollar become the new Petro currency?
Petro currency is given to currencies from countries that make massive exports of oil to the point that their oil revenues contribute a big part to their economy. Countries that are given the Petro currency term to their currencies include Canada, Norway, and Russia. Can the USD pass as a Petro currency as well?
The US produces so much oil that they now have a big say in the global pricing of oil prices. Saudi Arabia used to have this say, at least before the shale revolution. But we are guessing that things have now changed. The US is the new swing oil producer. In fact, the US will trade more as if it is a Petro currency soon. As US’s oil exports share grow more than their imports, oil revenue’s role economy will become more extreme in its economy that it will act more like a Petro currency.
Why are we talking about this again?
The relationship of oil’s and the US Dollar’s price used to be highly inverse. Things are about to change — or have started to change. When oil price hikes, so will the USD’s price. This is crucial to know as a trader because this will dramatically change and impact the way we trade since the USD is one of the most-watched currencies.