is trading oil just trading the dollar

[billyjoerob]

A guy on twitter called Raoul Pal posted this chart to show that oil trades exclusively on the dollar:

The implication is that if dollar goes up, oil goes back to $20s. That seems really unlikely based on supply and demand for oil, but what if he's right? Oil is priced in dollars, so if dollar goes up 30% and oil goes down 30%, the net effect to an oil exporter like Nigeria is zero, and hence there's no reason to stop pumping, even if oil is at $30. And the market for the dollar is vastly larger than the market for oil. About $1.6T of oil is produced and sold annually, not a huge amount compared with the massive amounts traded daily in foreign exchange. Does anyone have a good case that oil doesn't trade exclusively on the dollar?

 

[Metamega]

Well oil is listed in U.S dollars

 

[wintergasp]

or...... is trading the dollar just trading oil

 

[billyjoerob]

or...... is trading the dollar just trading oil

oil just isn't that big a market. $5T forex daily, $1.6T oil annually.

 

[wintergasp]

oil just isn't that big a market. $5T forex daily, $1.6T oil annually.

I know it was a joke. To answer your question, no trading Oil is not just trading USD. Your chart is a spurious correlation.
http://www.tylervigen.com/spurious-correlations

 

[wintergasp]

oil just isn't that big a market. $5T forex daily, $1.6T oil annually.

And the real FX market is much less than 5T, it's more 500B to 1T per day, the rest is just back to back swaps, not really traded volume. You can aggregate the volume of a few venues like Currenex, FXAll, Integral, CFH, Fastmatch etc. and you'll see it's not as big as the media claims

 

[billyjoerob]

And the real FX market is much less than 5T, it's more 500B to 1T per day, the rest is just back to back swaps, not really traded volume. You can aggregate the volume of a few venues like Currenex, FXAll, Integral, CFH, Fastmatch etc. and you'll see it's not as big as the media claims

OK thanks for clarifying that, I knew my number was off. Even if dollar trading is just 25% of that, it still dwarfs the oil market.

 

[spread'em]

I did a similar study back in august which showed the correlation going back 5 years. Still pretty strong. I believe FX rates have a big impact on markets. Just look at the weakness of the GBP and it's impact on the FTSE 100 and UK wheat exports which have both risen against consensus. There is a definite effect...I will leave you to think on why though.

 

[billyjoerob]

I know it was a joke. To answer your question, no trading Oil is not just trading USD. Your chart is a spurious correlation.
http://www.tylervigen.com/spurious-correlations

As the dollar strengthens, oil exporters have more incentive to pump oil, all else equal: their labor costs are in local currencies, revenues are in dollars. So the price of oil has to adjust. Not a spurious correlation. The Russians haven't been as hard hit by the weak oil price as US producers because the Russians have benefited from selling in dollars but profits and labor costs in Rubles (Russian consumers of course aren't doing as well).

 

[billyjoerob]

Does this mean that Canadian oil has a kind of structural advantage vs the US? Canadian oil producers benefit from having essentially a petro currency - as the loonie declines and dollar strengthens, they benefit from selling in dollars while local costs are in loonies. So a Canadian producer in Alberta is much less exposed to the price of oil than a producer across the border in North Dakota. It also means that US producers are the most exposed to oil prices of any producers because US producers are not sheltered in any way from the decline in oil prices.