How far can Crude go?

It is observed that in current environment, the movement in crude oil is negatively correlated with the movement in the US Dollar. The following graph shows this relationship based on the historical trends of both ICE Brent Crude Oil and US Dollar Index (measures the value of US Dollar against some of the foreign currencies):

USD Dollar Index 1.png

The ICE Brent Crude Oil is currently at USD51.19 whilst the US Dollar Index is trading at 93.858 (as of 9 June 2016). Using a simple regression analysis, the statistical results are presented as follows:

USD Dollar Index 2.png

Based on the above relationship, we are able to derive a statistical forecast range for the ICE Brent Crude oil based on the movement in US Dollar Index:

USD Dollar Index 3.png

As shown above, the current brent crude price of USD51.19 is slightly lower than the forecasted value of USD57.04, with a 95% confidence interval of between USD23.16 and USD90.91.

Final Say

Movement of USD will depend largely on two contributing factors, namely: (1) timing of Fed’s rate hike; (2) “safe haven” status of USD if there is a global turmoil (e.g http://www.wsj.com/articles/a-bearish-george-soros-is-trading-again-1465429163)

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Author: Ken Utau

Markets Observer + Food Lover

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