Ahmad Ghaddar and Saikat Chatterjee

LONDON, (Reuters) – Oil’s bull market is not paying much attention to the U.S. Dollar. This breaks crude’s historic inverse relationship to the greenback. Analysts are now confident that it can go further based upon current market fundamentals.

Oil prices are affected by a strong dollar. This is because the currency makes it more costly for other holders, which can lead to a decrease in demand.

As clouds cover the economic outlook, the dollar is being supported by its safe-haven appeal. However, oil is rising due to Russian supply disruptions linked to Ukraine’s conflict and high demand.

Since late March, oil and the dollar have moved in the same direction. This positive correlation was at its peak since May 2019. Analysts expect this link to continue given tightening oil markets and other risks for the global economy.

The usual negative correlation between oil price and dollar held for much of 2020, and even into the early part 2021. This was because crude demand fell due to the pandemic.

Giovanni Staunovo, UBS analyst, stated that “considering that spare capacity has been low, there will likely be larger supply disruptions in the future, and that we are likely to keep increasing oil demand, I would expect oil will primarily drive by its fundamentals.”

The tight supply outlook, expectations of major disruptions in Russian oil production and the prospect that Russia will send troops to Ukraine on February 24, caused prices to reach a high point above $130 per barrel for the first time since 1994. 0ce3483a-371f-4bee-ae72-25bc5210fc783

GRAPHIC: Revised correlation chart (https://fingfx.thomsonreuters.com/gfx/mkt/egvbkwlrmpq/revised%20correlation%20chart.JPG)

As a result, oil is trading at $115/barrel as China’s demand worries and concerns about a slowdown in global economic growth have tempered supply fears. [O/R]

JPMorgan (NYSE) anticipates Brent prices will average $114 per barrel for the entire second quarter. However, they could rise to more than $120 per barrel during the interim. This measure measures the U.S. currency’s value against the basket of its competitors. It hit an all-time high of 105 in the month before and trades less than 3% lower.

Global economic conditions are being threatened by rising oil prices. The U.S. dollar is viewed as the safe-haven reserve currency that investors prefer. Russia anticipates that its oil production will fall more than 8 percent this year, to between 480m and 500m tonnes. The reason for the decline is because Russia has been subject to Western sanctions over Ukraine. Analysts believe that Europe has suffered the most from the current crisis in energy. This has contributed to the gap between oil prices and a stronger dollar. Ehsan Khoman, MUFG’s head for emerging markets research said that energy crises and inflationary shocks have been historically centered on the U.S. He said that Europe, which relies on Russian energy imports the most, is currently at the epicenter of the crisis and is struggling with large energy trade deficits. Khoman stated that as long as oil, coal and gas prices remain high due to scarcity of supply, global growth ex. U.S. has been suffering more than the U.S. and, by extension, is increasing in value.

MUFG anticipates that there will be continued divergence in the dollars and other commodities than oil. Callum Macpherson, head of commodities at Investec says oil’s relationship to equities is also declining. He said that oil generally tracks closely with the, but this correlation is now gone completely due to tightening of economic conditions and high energy prices.

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GRAPHIC: King dollar (https://fingfx.thomsonreuters.com/gfx/mkt/byprjdqgape/King%20dollar.JPG)

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GRAPHIC: Brent price (https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgzjyqpb/oil%20price%20brent.JPG)