The strength of the U.S. dollar significantly impacts what you pay at the pump. With the U.S. presidential election several months away, both candidates have vowed to bring down oil prices during their upcoming terms. Democratic candidate Kamala Harris is promoting electric vehicles and price controls to combat perceived “price gouging” of consumers. At the same time, Republican candidate Donald J. Trump is calling for a return to “Drill Baby Drill,” calling for reduced regulation and increased production to lower gasoline prices for consumers.

While supply and demand forces are the primary determinant of commodity prices, we also decided to also take a look at the strength of the U.S. dollar and its impact on U.S. oil and prices, as indicated by spot prices for West Texas Intermediate (WTI) crude oil. WTI is a light, sweet crude oil, which refers to its low density and low sulfur content, and it is preferred for conversion to gasoline and diesel fuel. Although WTI is priced in Cushing, Oklahoma, this benchmark contract is tied to energy markets around the world.¹

The Dollar’s Impact on Oil Prices

Since oil is traded in U.S. dollars, when the U.S. dollar strengthens, it makes oil more expensive to purchase with other currencies. As a result, demand outside the U.S. may decline, leading to a decrease in oil prices.

With a weaker U.S. dollar, when compared to other currencies, it takes less of those other currencies to buy oil. This makes oil less expensive for buyers using other currencies, potentially increasing demand.

With this foundational understanding, let’s examine how the strength of the U.S. dollar has historically impacted oil prices. Historically, periods of a strong U.S. dollar have often coincided with lower oil prices, while periods of a weaker dollar have been associated with higher oil prices. However, this relationship is not perfect and can be influenced by other factors, such as geopolitical events, OPEC+, changes in oil supply, and global economic conditions.

To test this relationship, we reviewed the correlation between the U.S. dollar to Canadian Dollar exchange rate and oil prices over the period from September 2003 through present, considering weekly average exchange rates² and oil prices.³ Canada was selected for this analysis, as the United States and Canada are major trading partners, and the USD/CAD exchange rate directly impacts the cost of these goods and services.

Oil Prices and the Strength of the U.S. Dollar

As shown, there is a notable inverse relationship between the strength of the U.S. dollar and WTI oil prices, indicating a stronger dollar supports lower oil prices. Therefore, consumers will benefit from a stronger U.S. dollar, both for gasoline and other goods. In fact, the analysis shows that over the long term, changes in the value of the U.S. dollar to Canadian Dollars statistically explain 42% of the changes in oil prices, a statistically significant relationship.  Most notably, over the period reviewed, oil prices were never below $80 per barrel when the USD/CAD exchange rate was $1.00 or less. Likewise, the were never above $40 per barrel when the USD/CAD exchange rate was $1.40 or more.

Key Takeaways

As voters consider their choices in the upcoming election, understanding how these economic factors interact may inform their decisions. If both presidential candidates truly want to lower oil prices to help combat inflation for U.S. consumers, promoting policies that increase the supply of oil and strengthen the U.S. dollar should be considered in tandem. Given the recent population growth in the U.S., along with expected future energy demand requirements for artificial intelligence programs and the required infrastructure to support them, policies designed to reduce demand for U.S. energy will be up against significant headwinds.

WTI Strip Prices Decrease

Spot prices and futures prices for the West Texas Intermediate (WTI) contract decreased approximately $10.00 per barrel in the near term and decreased approximately $3.00 over the longer term.

WTI Strip Prices - One Month Change

As shown, the oil price curve remains in a state of “backwardation,” reflecting the market’s expectation of lower future spot prices.

Oil Price Outlook

The price distribution below shows the crude oil spot price on September 11, 2024, as well as the predicted crude oil prices based on options and futures markets. Light blue lines are within one standard deviation (σ) of the mean, and dark blue lines are within two standard deviations.

WTI Crude Oil $ /BBL

Based on these current prices, the markets indicate there is a 68% chance oil prices will range from $55.00 and $77.00 per barrel in mid-December 2024. Likewise, there is roughly a 95% chance that prices will be between $40.00 and $92.00. By mid-February 2025, the one-standard deviation (1σ) price range is $53.00 to $79.50 per barrel, and the two-standard deviation (2σ) range is $35.50 to $99.00 per barrel.

Key Takeaways

Remember that option prices and models reflect expected probabilities, not certain outcomes, but that does not make them any less useful. Throughout most of 2023 and 2024, crude oil spot prices have primarily fluctuated within the range of $70 to $90 per barrel. During that time, we observed general increases in futures price volatilities as prices neared the upper bound of that range, as evidenced by the futures price ranges observed. For mid-February 2025 pricing as of September 11, 2024, the 1σ range had a spread of $26.50 per barrel, and the 2σ range had a spread of $63.50 per barrel. For comparison, in 2022 we observed 1σ and 2σ price ranges in excess of $65.00 and $150.00, respectively.

1. "WTI Product Overview," CME Group Inc.
2. "USD/CAD (CAD=X)," Yahoo Finance.
3. "Petroleum & Other Liquids," U.S. Energy Information Administration.