oil price and dollar correlation

Oil price and dollar correlation

Updated March 2023

Before we provide a history of calls dating back to 2008 in the oil, gold and Dollar markets. Let’s start with the outlook for oil and the dollar in 2023

The outlook for oil and the dollar in 2023 is complex and multifaceted. According to Goldman Sachs, the short-term path for oil prices will likely remain volatile due to a stronger US dollar and weaker demand expectations, putting downward pressure on oil for the rest of the year. However, the ongoing global supply disappointments reinforce its long-term bullish outlook, and oil is expected to rise above $100 a barrel in 2023.

Goldman Sachs also cut its 2023 oil price forecast due to expectations of weaker demand and a stronger US dollar, lowering the forecast for next year by $17.5 per barrel on average. However, it still sees a seasonally adjusted global oil market deficit in the fourth quarter of 2022 and in 2023, with global oil demand growing 2023 by 2.0 million barrels per day (bpd) at current prices.

According to a column, the outlook for oil is bright in the long term, with prices expected to average around $90 in 2023-2027. However, there may be a severe supply problem in 2024 as spare production capacity runs out, particularly if Russian oil exports drop due to sanctions and Chinese demand recovers as the country ends its Covid Zero policy.

Regarding the US dollar, it is expected to put in a multi-year top in 2023, suggesting that the outlook for oil in the long term should be positive. However, the dollar’s strength may put short-term pressure on oil prices. The dollar is expected to test its 2022 highs before it starts its downward journey.

A Trip Down Memory Lane

Recognizing an opportunity and using it is the difference between success and failure. Author Unknown

This is what we said almost 15 years ago:

The dollar came within striking distance of our first target, 90, and it’s still possible it could hit the higher targets in the 93-96 ranges. The dollar is now due for what appears to be a sharp correction, and if this correction gathers more steam, it could result in a resumption of the dollar’s downtrend. Market update Nov 25, 2008.

Today, the dollar has been observed to trade below the crucial price point of 85.50. This occurrence indicates that the corrective phase is beginning to gain momentum. It is important to note that during this phase, the dollar should not trade below 83.70-84.00 for more than six days. If it does, the next potential target could be 81. If 81 is hit, a rally should ensue, and the dollar must test at least the 83.00 range before experiencing a pullback. Failure to do so could result in the following target becoming 78.

It is worth noting that the dollar can trade down to 75, yet a new high may still be within reach. However, if the dollar trades below 75 for three consecutive days, it is imperative to consider the possibility that it may have peaked and is now poised to continue its downward trajectory.

Tactical Investor: Early Bird To USD Rally

In the not-too-distant past, we cautioned that the dollar’s upward momentum would unlikely last indefinitely. The recent dip below the crucial price point of 85.50 indicates a peak may have already been reached. Whether the dollar stages a rebound or not, its long-term trajectory is decidedly downward, with new lows likely to be established in 2009 before stabilizing at a more sustainable level.

Should a secondary rally occur, it will only postpone the inevitable downtrend rather than alter it. It is essential to keep these longer-term trends in mind when evaluating the current state of the dollar and making investment decisions.

Oil price and dollar correlation: Historical Look

If it trades below 63 for more than three days in a row, the next target will be a test of 54. Market update, Nov 4, 2008

Oil has now hit almost all its normal targets we are now entering into the extreme target ranges. Oil traded below 54, tested 51, and it had to trade above 54 within three days of testing 51; instead, it traded below 51 and, in doing so, has now triggered the possibility of testing the 45 mark. Market update Nov 25, 2008

Crude oil prices tumbled to a low of 40.50 before finding some relief in a subsequent rally. It is unsurprising to witness such a recovery, given that the oil market is presently in a state of oversold conditions. However, the rally is expected to face significant resistance at the 48 levels. If oil can sustainably trade above this range for three consecutive days, it may pave the way for a test of the 56 range. However, oil prices will likely retest their previous lows before the formation of a long-term bottom.

In contrast, it is essential to note that Oil has a strong support level in the 39.00-40.10 range, which used to act as resistance for years until it was finally breached. This zone of resistance-turned-support has proven to be a stronghold for the oil market, and any sustained trading below this range could spell trouble for the market. A break below this critical support level could trigger a test of the 28.00 range, indicating a significant drop in the price of oil. As such, the market must maintain its current levels and avoid prolonged trading below the 39.00-40.10 range.

Bond Market Outlook

The bond market’s current trajectory may cause concern, as a continued rise in bond prices without a correction could lead to a severe eventual correction. This was also the case with the oil markets, where a failure to correct led to an unimaginable price drop due to the credit crisis.

In recent weeks, the bond market has experienced a spectacular rally, with investors flocking to treasury notes and bonds in search of safety. However, this surge may be unsustainable, and a pullback is due.

The speed and depth of the rally are unprecedented, with the bond surging over 22 points in under 30 trading days, a gain of nearly 20%. To put this move into perspective, a similar rally occurred in April 2003, with bonds gaining roughly 13 points in 3 months. The current situation warrants caution, as such rapid and significant movements in the bond market, often precede a top.

The surge in the bond market over the past few weeks has been nothing short of extraordinary. It’s almost unprecedented. The speed and depth of the rally are both staggering. Consider this: in April of 2003, the Federal Reserve was worried about deflation, and bonds rallied about 13 points, or roughly 12%, in just three months. That move now pales in comparison to the current rally, which is almost vertical and looks monstrous by comparison.

When we examine the first chart and compare it to the second one, we see just how significant the current move is. Historical evidence suggests that the outcome is generally negative when the masses start to stampede. In 2003, after a brief rally that lasted approximately three months, bonds experienced a severe correction, giving up all their gains in less than two months and establishing new lows.

We believe there is a strong possibility that this pattern will repeat itself, even though we may not see it at the same rate as we are now dealing with almost unparalleled levels of mass hysteria. Nevertheless, once the masses emerge from their fear-induced trance, we can expect bonds to experience a severe correction. It’s important to note that when bonds rally, interest rates fall, and vice versa.

What’s Gold Up to?

Very Short-term trend= bullish; a strong positive divergence signal was flashed so gold could trade up all the way to 840 before pulling back. Nov 4, market update 2008.

Gold nearly reached 840, trading as high as 832 on Thursday before retreating. After initially predicting an 840 target on November 4th, we have since raised our targets for gold, with the potential of reaching 930. However, the upside targets have been slightly lowered due to the sluggish pace of its rally.

The outlook for gold weakened after it broke out in late November, rising to 830 and falling to 740 before stabilizing. Presently, the upside targets are 870-900, and to reach these ranges, gold must exceed 810 and not fall below 780 on a closing basis, remaining above 780 for at least nine consecutive days.

After testing the 870-900 ranges, gold will likely experience one final correction, potentially falling to the 720 range. A break below this level for more than 7-9 days may result in a test of the 650 range. The next correction will likely form the foundation for a long-term bottom, and gold could rise to 1200 before experiencing another correction.

Oil price and dollar: The Middle East Factor

The Arab world is investing significant sums of money in gold bullion, despite concerns about deflation. This is contrary to what one might expect, as typically, during times of deflation, investors seek out safe-haven assets such as cash and bonds. In contrast, the US Federal Reserve is so fearful of deflation that it is taking drastic measures to prevent it, even if it means risking hyperinflation in the future.

The Fed is currently hyperinflating the money supply by inflating it aggressively. Despite this, inflationary pressures are not yet affecting the global economy because central bankers are holding onto the money rather than lending it. However, it is likely that they will eventually return to their usual practices and start lending money again.

Random Financial musings

It is essential to recognize that holding onto significant amounts of cash for the long term is not a wise business strategy. However, this does not mean that one should immediately invest all their money into the market or gold. Instead, there will come a point in the not-too-distant future when investing in select stocks, silver bullion, gold bullion, etc., is more beneficial than to continue holding onto cash that will eventually lose its value.

We will strive to advise our subscribers about the significant changes impacting the investment world. We still believe that stocks are trading at prices that will likely not be seen again for decades and that the commodities bull still has a long way to go before its demise can be predicted.

Making decisions in a world that is becoming more densely populated with useless projects is becoming increasingly challenging. The balance of too many things is uncertain, and disappearing is no longer an option. This indecision can lead to total paralysis, where even the most minor decision requires infinite energy and time.

Jean Baudrillard
French Postmodern Philosopher, Writer