How many times have you seen this: 'Because the U.S. dollar is the quoted currency in oil, a stronger dollar buys more oil per dollar and causes the price of oil in dollar terms to fall. The opposite is true when oil rises.''This is called received wisdom, something so glaringly obvious that it doesn't stand further scrutiny. Or does it'Currently, the U.S. produces just over 9.1 million barrels per day (b/pd) of crude oil, the majority of it WTI or equivalent. Of that, only a very small portion is exported and is consequently subject to currency fluctuations. According to Platts, 'While the U.S. will likely continue to import significant volumes of crude in the foreseeable future, the import/export balance is likely to see only moderate increases on the export side from the current 600,000 b/d, given economics and logistical limitations.' Taking the Platts export number as a benchmark, that represents only about 6.5 percent of daily U.S. production that must be purchased with foreign currencies, assuming that these exports are destined for delivery to non-US$-denominated areas (i.e., the crude is not going for example to St Croix in the US BVI.) The possibility also exists that exports can be re-exported imports.Even if exports from the U.S. do increase substantially in the future, we're still probably talking about no more than 10 percent of WTI purchases having any sensitivity to currency movements because WTI (unlike Brent) is a U.S.$-denominated commodity purchased with U.S. dollars in the U.S. and not with foreign currency translated into U.S. dollars from buyers around the world.The Other Side of the Currency EquationSo when the U.S. Federal Reserve Board (FOMC) raises interest rates, what effect will that have on the price of oil' Again, the received wisdom is that when the value of the U.S. dollar increases, the global price of oil drops, because oil is bought and sold in U.S. dollars. A more valuable dollar buys more oil. Conversely, a weaker dollar buys less oil, so when the dollar depreciates, the global price of oil rises. The assumption therefore is that higher rates equate with a higher dollar and that translates into lower crude oil prices. Speculators in the WTI futures contract can therefore be expected to behave accordingly.But do higher rates really impact the cost of a U.S.$-denominated commodity bought and sold in U.S. dollars' Certainly, the dollar comes into play as higher interest rates affect the cost of carry or the investment leverage factor, which is then reflected in the futures basis (the difference between a commodity's spot price and that reflected in the futures price.) In addition, currency plays a role in spread trading between WTI and Brent and in other forms of arbitrage in the overall energy complex. 'Currency' also plays a role in WTI pricing to the extent that prices paid at the well-head and Cushing can vary dramatically; but that's a question of how many dollars are on the table, not how much the dollar is worth. It's also salutary to remember that the underlying price structure for WTI and Brent is anything but monolithic (see Oil Prices Beyond WTI And Brent By Drilling Info) But otherwise, rates and the projected value of the dollar aren't really that relevant. In other words, neither factor is very useful in accurately forecasting the direction of the price of WTI. For that, you have to look to more basic fundamental issues such as supply/demand equilibrium, technical factors and charting, and the omnipresent headline-seeking algorithmic traders.The Usual SuspectsIf WTI were priced in euros or even against a basket of major global currencies like the U.S. Dollar Index (DXY), then U.S. dollar strength and changes in U.S. domestic interest rates would indeed be key factors in any discussion of the price of crude. But in the case of WTI, it may be that newspaper headline-writer laziness more than anything else is responsible for propagating the too familiar shibboleth: the dollar is higher today, and that's why crude is lower. Maybe it's time for the media to change its tune.SEE ALSO:Here's how to avoid land mines in fixed incomeJoin the conversation about this storyNOW WATCH: Your neighbor's WiFi is ruining yours ' here's how to fix it
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