Signs that the US Federal Reserve might boost interest rates this month provide a useful reminder that supply and demand don't explain everything about oil prices.
Because crude transactions are based on US currency, dollar strength and weakness influence oil prices, too.
If the Fed does act to lift interest rates, as indicated in minutes released Apr. 6 of a mid-March meeting of the Federal Open Market Committee, the dollar will tend to strengthen, pushing oil prices-sorry, producers-downward.
The reverse occurred in March.
Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices, says dollar weakness that month helped boost prices of oil and other commodities.
The relationship doesn't work equivalently in both directions.
In a research note this month, Gunzberg says a falling dollar has more ability to boost commodities than a rising dollar has to lower them-possibly because of opportunistic buying when commodities are cheap.
"The falling dollar is 4.5 times more powerful than the rising one on commodities," she says.
Every commodity benefits from a falling dollar, metals most. A rising dollar lowers values of most commodities but not sugar, gold, live cattle, and feeder cattle.
Sensitivities to dollar changes vary.
Based on S&P Dow Jones indices over the past 10 years, Gunzberg calculates that for every 1% increase in the dollar value, crude oil fell by 1.774%. Among 24 commodities, only nickel was more sensitive to a strengthening dollar.
On average, all the commodity indices fell 0.872% with every 1% dollar-value increase.
By contrast, commodity indices rose by 3.932% for every 1% decline in the dollar. Crude oil increased by 4.252% for every 1% dollar decline, ranking 12th among the commodities.
Natural gas is the only commodity hurt more by a rising dollar then helped by a falling one.
"It may be since it is so difficult to store," Gunzberg suggests.
Probably so. For the record, though, live cattle aren't easy to keep still in one place, either.
