Global Dollars and Oil "because that's where the money is"

The Gist: It’s not the dollar but rather the growth in global dollars that leads oil prices.

---

During the 2000s super-cycle, the Bush administration pursued a weak dollar policy as it was engaged in two overseas wars and twin deficits.

As a result, the energy investing community, myself included, was conditioned to put our faith in the observation that a weak dollar is good for oil prices and vice versa as shown below.

Many point to the Nov-2014 OPEC meeting as the beginning of the crash in oil but it really started earlier that summer when Yellen spoke of exiting QE.

The dollar strengthened and oil started to weaken.

Former Saudi energy minister Ali-Naimi would give the knockout punch the following November.

Good times.

Fast forward to January 2018, the Trump administration began a trade war with China and this relationship that held for so long broke down.

As the chart shows it would appear that the dollar and oil are now more positively correlated.

This has many scratching their heads.

As the story goes, when Willie Sutton was asked why he robbed banks, his witty yet very truthful response was “Because that's where the money is.”

So when I try to get a sense of the direction of oil prices, I look at where the money is headed.

It is not the level of the dollar vs other currencies that matters but rather the growth rate in global dollars that has never broken down.

The chart below plots Global M2 Money Supply (GM2) using the world’s largest economies and translates them to U.S. Dollars.

Voila! A symbiotic relationship that has held.