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There's More to Crude Oil Than a Weak Dollar

Stocks in this article: MRO CVX

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Ivan Martchev for InvestorPlace

NEW YORK ( InvestorPlace) -- Since rebounding off the panicked "Europe" low in early October, crude oil is up 35% while the U.S. Dollar Index is up 1.7%.

Often, crude oil rallies have been associated with dollar selloffs, giving credibility to the idea that a falling dollar tends to boost the price of crude oil.

This is true, but there is quite a bit more to it. A falling dollar driven by easy Federal Reserve policies and a rising trade deficit boosts the price of crude oil as it is traded internationally in dollars, which in turn tends to suppress the dollar via increasing the trade deficit due to more expensive crude imports.

And so the feedback loop repeats...

But there is another (more) important driver of crude prices. Emerging markets tend to have faster GDP growth that is more energy-intensive, as their economies industrialize and consumers spend newly created wealth.

Most emerging markets also have strong population growth. As the oil use per capita grows much faster from tiny bases than the level of consumption in the developed world, is it any wonder that there is upward pressure on the price of oil?


Still, those are long-term strategic considerations. From a short-term tactical perspective, we have geopolitics and seasonality driving the price.

There always are issues in the Middle East, and Iran has been in the news (again!), resulting in a perfect storm right in the middle of driving season. It is entirely possible to see a rather large spike this summer, with or without a dollar selloff, with driving season and seasonality kicking in.

(Most people refer to the dollar exchange rate using the U.S. Dollar Index, in which the euro -- clearly a problematic currency -- has a 57% weighting. A better gauge is the Trade-Weighted Broad Dollar Index, thanks to its broader composition, including BRIC and other currencies.)

Cracks Spreads Are on Crack!

The layman's definition of a refining crack spread is the level of profitability per barrel of oil. This profitability is seasonal, and you can't do anything about that.

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