Investment Analysis, Oil prices and the strength of the Dollar Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Introduction

There has been a consistently significant correlation between the U.S dollar and the oil prices historically. Whenever the dollar had appreciated and strengthened against other currencies, the oil prices tend to fall and vice versa. The US oil imports have explained this relationship for a very long period of time. However, according to one of the reports by Goldman Sachs’s member, Jeffrey Currie, the rationale that had existed between the US dollar and the oil prices has been broken down as a result of the shale revolution of America.

In the year 2008, the total imports by the US on a net basis have been around 12 million barrels per day for all kinds of the oil and its products. However, today that number has fallen to around 5 million barrels per day as a result of the shale technology. If the imports of Mexico and Canada are subtracted then the number falls to around 2.4 million per day. The net imports have fallen by around 60% as compared to the exports figure in the year 2008. As a result of this, the correlation between the US dollar and the commodities has reduced significantly.

Most of the major US investors have believed in the past that the strong correlation between the US dollar and the oil prices has been due to the large US current account deficit of the US. The widening of the US current account deficit has been experienced as a result of the increasing oil imports from the year 2000 to the global financial crisis. This had further put more pressure on the current account deficits and as a result of which, the dollar has further weakened.

In the international crude oil trading, the US dollar has been used as the ultimate invoicing currency. Therefore, it has always been seen that there has been a strong correlation between the US dollar exchange rate and the dollar crude oil prices. Specifically, since the year 2002, the dollar exchange rate has depreciated and the dollar crude oil prices over the same time period have increased. This has occurred in terms of the real effective exchange rate.

Therefore, this has resulted in the possibility that strong co-movements might exist between the US dollar exchange rates and the dollar crude oil prices over the long run and as the dollar price of the crude oil is increased it should be associated with the dollar exchange rate depreciation. As the dollar has depreciated, the oil has become cheaper for those countries whose currencies are appreciating such as the yen and the euro.

Therefore, if the US dollar exchange rate affects the dollar price of the crude oil and impacts it significantly, then it would not be wrong to raise the question of the most appropriate invoicing currency for oil invoicing. Therefore, as a matter of fact it is important to further investigate the link between the US dollar exchange rate and the dollar prices of the crude oil. If a long run and up to date data is used, then the real relationship between the crude oil prices and the dollar exchange rate can be explored further in detail.

The prices of the oil have shown strong volatility over the years and the trend has continued since the time of the second oil shock. The prices of the crude oil exhibit a very high degree of volatility, which has varied over the time and between the time periods of 1987 to 2005. Furthermore, there have also been many other factors that have been reported in the literature that have been the reason for this huge volatility in the prices of the crude oil, which include the interruption of the oil supply and the production and the political war or the instability factor.Investment Analysis, Oil prices and the strength of the Dollar Case Solution

The main objective of this research paper is to further examine the correlation between the US dollar exchange rates and the dollar crude oil prices. All the major types of the crude that are traded on the market have been studied in this study in detail with their relative relationship and dependency on the changes in the US dollar exchange rates. As part of the qualitative models, the correlation and the regression models have been used to identify the current extent of the dependency of the crude oil prices on the relative US dollar exchange rate....................

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