I was going to write a piece to update recent issues with oil prices, and came across this article which essentially includes the point I wanted to make: despite no change in the global physical markets for oil, prices are declining, which is the result of the strengthening US dollar caused by Brexit. The relevant parts:
Moreover, price movements are also largely dictated by the interaction between global currencies. Since oil is priced in U.S. dollars, any strengthening of the dollar relative to other currencies makes crude more expensive, cutting into demand and pushing prices down. The crash of the British pound over the past two trading days is having this effect. The pound is now down 10 percent from the pre-Bexit vote last week; the euro is down 3 percent. The U.S. dollar index, which measures the currency’s strength against a basket of six major currencies, is up. The dollar jumped by another 1 percent on Monday, to a three-month high.It is no coincidence that oil prices plunged at the same time as the dollar surged. “We all got it wrong,” Michael Lynch, president of Strategic Energy & Economic Research, said in an interview with Bloomberg. “This is strengthening the dollar, which is bad for commodities."As I've argued in several pieces, I believe the reasoning that explains the decline is hogwash! A change in the dollar does not cause a rapid change in oil demand; the explanation is that the dollar-oil trade is a favorite of hedge funds and other global investors.
