How much can the U.S. dollar impact energy prices? UBS weighs in
Investing.com - Often in commodities markets, a rise in the U.S. dollar can signal a dip in oil prices, as a stronger greenback can make dollar-denominated crude more expensive for overseas buyers.
As a result, a strengthening in the American currency in recent years has weighed on energy prices in particular, although its impact has been felt in other commodities also quoted in U.S. dollars.
Shifts in market sentiment can also factor into the dollar and energy prices. Times of uncertainty can lead to risk-off sentiment, boosting safe-haven demand for the dollar, while more buoyant periods of market feeling can soften it.
Most commodities, on the other hand, suffer in risk averse environments and do well when the global economy is in better health.
But, when viewed over a 30-year time span, the ties between the dollar and commodities can become more tenuous, research from UBS has shown.
In a note to clients earlier this week, analysts at the Swiss bank led Giovanni Staunovo found that, within the energy sector, on average, U.S. natural gas , thermal coal, and crude oil all have an inverse relationship to changes in the value of the U.S. dollar.
However, in other commodities, these types of correlation patterns can vary and are "far from stable", the analysts said.
U.S. natural gas, for instance, is "largely uncorrelated" with the dollar, they noted, adding that because the U.S. has historically been self-sufficient in its supply of the product, "prices are mainly a domestic story".
"Despite rising U.S. exports of natural gas by pipeline to Mexico and lately via liquefied natural gas export terminals to the rest of the world, the correlation has remained close to zero," the analysts flagged. They said one reason could have to do with imports via pipeline from Canada being of similar magnitude to the U.S.'s exports to Mexico.
Thermal coal also have a relatively weak connection to the U.S. dollar as well, they argued, citing the fact that China is both the largest coal consumer and producer and is "mostly self-sufficient". The commodity is abundant in China and cheaper than natural gas and crude oil, reducing China's dependency on importing it, they said.
"So, while US natural gas is a US story, thermal coal is a Chinese story," they wrote.
Crude oil has the biggest inverse linkage to the greenback, although even that is not reliably stable, the analysts said.
"Economic crises such as the global financial crisis in 2007-08, the European debt crisis of 2010, and the COVID pandemic in 2020 resulted in a high negative correlation. In contrast, spikes into positive correlation territory resulted from large production disruptions in Iraq and Libya in September 2013," they said.
Taken together, the analysts said that while it cannot be dined that a weaker U.S. dollar can support energy sector prices over a short timeframe, the correlation is not sufficient enough to make the greenback a key factor when guiding for higher or lower prices.
Instead, supply and demand factors are the stronger driver of commodities, they said.
"We therefore still hold a moderately constructive outlook for crude and U.S. natural gas and a cautious outlook for thermal coal," they added.