BAKU, Azerbaijan, May 20
By Leman Zeynalova – Trend:
Oil prices will still rise despite the forecasts regarding the strengthening of the US dollar, Trend reports with reference to the UK-based Capital Economics research and consulting company.
“The recent depreciation in the US dollar has helped to boost commodity prices. But while we expect a stronger dollar to weigh on most commodity prices later this year, we think that oil prices will still rise.
The majority of commodity benchmarks are priced in US dollars and there is typically an inverse relationship between the two assets. If the dollar appreciates, the costs of production in US dollar terms in non-dollar countries falls, which puts downward pressure on commodity prices. A stronger dollar can also encourage supply as commodity producers would receive more in local-currency terms for their good. Of course, it takes time for this process to occur, but it has been so ingrained in the minds of most traders that commodity prices often move almost instantaneously in response to changes in the dollar,” reads the latest report released by Capital Economics.
The dollar strengthened in Q1, but it has since given up most of these gains as US real yields have fallen, says the report.
“We think the US economy will outperform its peers in the near term and we expect US real yields to rise faster than those elsewhere, both of which should boost the greenback relative to other currencies. A stronger dollar would weigh on commodity prices later this year, particularly the precious metals where the relationship has typically been very strong.
That said, we think that oil prices will overlook dollar strength and that other factors will drive the price. Oil has a relatively weak relationship with the dollar, and we expect that this will continue to be the case. Instead, we suspect that the release of pent-up demand, at a time of constrained global supply, will help to keep the global oil market in a deficit and boost prices. All told, if we are right and the US dollar appreciates, this would drag on the prices of both industrial and precious metals. Nevertheless, we doubt that the price of oil would fall as other factors, primarily strong growth in demand, should support prices,” reads the report.
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