Saudi Arabia-Russia supply cuts disrupt oil and U.S. dollar relations. Oil’s propensity to move in the opposite direction of the U.S. dollar has been disturbed by decreases in Saudi Arabia and Russia’s crude supplies, which coincided with an increase in U.S. interest rates. Analysts predict the equation will ultimately be restored when the economy becomes more gloomy.

Oil prices are often affected by a strong dollar since it increases the cost of the commodity for holders of other currencies, which reduces demand for petroleum. Due to the United States raising interest rates to combat inflation and top OPEC+ oil producers Saudi Arabia and Russia unilaterally reducing output outside of OPEC+ accords, both have risen upward simultaneously.

As Saudi Arabia and Russia cut 1.3 million barrels per day (bpd) of production until the end of the year, oil prices in September rose to their highest levels in ten months.

Interest rate increases have boosted the dollar, and investors have factored in the possibility that rates would remain high longer as central banks struggle to control inflation. The latest inflationary pressures are a result of higher energy costs.

Although the inverse link between oil and the dollar can occasionally be briefly disturbed, it has remained constant.

The dollar was going in the same direction as oil when Brent prices reached an all-time high of over $147 a barrel in early July 2008, according to LSEG data, but the connection was less strong than it is now.

The two had the highest link over the last 20 years around the middle of 2018, when a surge in Chinese demand drove prices up.

EXCELLENT CORRELATION

Since early September, the U.S. dollar and Brent oil have been moving in the same direction. On September 29, the positive correlation reached its peak since mid-March. Analysts predict that the correlation will pass quickly.

According to Colin Asher, senior economist at Mizuho, “The dollar is very expensive, and my macro forecasts for next year are fairly pessimistic, with the U.S. joining other regions in recession.” “Against that backdrop, I struggle to see how commodity prices can continue to rise.”

According to Francesco Pesole, FX strategist at ING, the relationship between the strong dollar and oil prices won’t likely return to normal until the U.S. Federal Reserve adopts a more dovish stance, signaling that the fight against inflation has been won and rate cuts can start. He predicts that this will happen sometime in the first quarter of 2024.

According to experts and economists, the effect of rising oil prices on consumption largely relies on whether prices are driven by supply or demand; they increase if supply is anticipated to fall short of demand or if demand is anticipated to outpace supply.

The present high price of oil is partially a result of the OPEC+ reduction. According to JP Morgan analysts, this supply shock is anticipated to reduce consumer spending power, hinder economic development, and ultimately reduce oil demand.

The combination of relatively high oil prices and the strong dollar cannot endure for long, according to Saxobank analyst Ole Hansen, given the high interest rates in important Western nations.

Brent oil peaked at $97 per barrel in late September. The price of Brent, however, fell over 12% to $84.07 per barrel as of Thursday’s closing from $95.31 per barrel on September 29 due to the macroeconomic shadow of doom.

Oil markets responded to military hostilities between Israel and the Palestinian Islamist organization Hamas and concerns that a larger conflict may affect the Middle East’s oil supply by raising prices by as much as $4 a barrel on Monday.

The fuel price will increase inflationary pressure if Brent rises beyond $100. Then, according to Tamas Varga of oil broker PVM, central banks may be obliged to raise rates again in 2024 and maintain them higher for longer. “I believe that ultimately, the strong dollar will depress demand.”