With North American rig counts at their highest since September 2015 and U.S. imports decreasing as exports increase, U.S. shale oil production is influencing more than just the world oil market. According to Hans Redeker, global head of foreign exchange strategy at Morgan Stanley Investment Management, the U.S. dollar is starting to trade like a petrocurrency – drifting away from its previous inverse relationship with oil. Best of all, the increased output is creating vast improvements in U.S. energy funding conditions and major increases in capital availability.
U.S. Dollar Moves toward Positive Oil Price Correlation
Traditionally, high oil prices don’t translate to a strong USD, or low oil prices to a weak USD – unlike the currencies of major oil exporting countries like Canada, whose dollar value rises and falls with the price of oil (since 99% of Japanese oil is imported, the exchange rate for the Canadian dollar and the Japanese yen correlates around 85% with the price of crude).
Yet, according to Hans Redeker, OPEC production cuts and America’s abundant access to shale oil has made the U.S. a major player in global oil, and ever-decreasing imports – along with increased exports – are causing the U.S. dollar to shift toward a positive correlation with the price of oil.
"The USD has started to trade like an oil currency shifting away from a previous relationship seeing the USD and oil in an inverse relationship," said Redeker. "This new relationship makes sense."
U.S. is New Swing Producer in Global Oil Arena
According to Redeker, there are two reasons the impact of crude prices on the U.S. dollar is shifting. First, increases in U.S. oil production have allowed it to surpass OPEC in sway over global oil prices, making the U.S. the new swing producer in the global oil arena.
OPEC and non-OPEC members agreed to cut output by around 1.2 million bpd in November. Conversely, U.S. boosted production. U.S. oil rig counts are up for the ninth straight week to a total of 631 according to Baker Hughes. This massive increase in U.S. shale production is pulling increased capital investment and has hampered OPEC’s effort to lift prices via production cuts.
USD Influenced By Shale Production Growth, Crude Export Boom, Capital Investment
Second, Redeker noted the effect decreased imports and increased exports have had on reduction of the U.S. trade deficit. Ten years ago, the U.S. imported 12.5 million barrels of crude and refined products per year. In 2016, imports fell to the lowest level since 1985. By the end of 2016, for the first time in history, the U.S. exported more crude to Latin America than it imported. U.S. shale has completely redrafted the world energy map.
According to Dreker, higher oil prices, improvements in North American funding conditions, increased availability of capital and dramatic production increases are starting to drive the U.S. dollar.
“The dollar and the price of oil have split away. There used to be an inverse relationship for many many years and that is no longer existent.” said Dreker. “And there is a very good reason, simply because the new swing producer of oil is very likely to become the United States of America with serious investment piling into that area.”
As the world’s fastest-growing oil and gas producer, we have the capacity to quickly become a net energy exporter. Oil and natural gas businesses are willing and able to produce. Yet, to achieve American energy independence, we must take the necessary strategic steps.
Innovative investment avenues and continued industry support from U.S. policymakers can mean a bright future for the U.S. as a global energy leader.