Crude oil and the dollar have been generally moving in the same direction since Donald Trump was elected president. OPEC production cuts and strong US demand has offset the dollar influence on the price of oil. Oil prices and the dollar have moved together 12 other times since 1980 and when that happens, it signals a robust economy and a situation where growth in the economy generally overshadows exchange rates. Yet with Chinese currency moves to stop its weakening outflow of capital, we may see more dollar versus crude oil price sensitivity. 

China’s reserves fell by $41 billion to $3.011 trillion in December, which was the sixth straight month in a row they have fallen, causing major concerns by the Chinese government. Chinese capital controls will add further strength to the dollar and perhaps impact Chinese import prices for oil slowing demand. The dollar today is the highest its been since 1986 and is moving higher and oil is moving lower.

OPEC compliance is looking good and non-OPEC also is joining in. Russia already is easing output as their oil production fell to 11.114 million barrels a day from January 1 to January 8. While Iraqi exports hit 3.51 million barrels of oil a day, a record high in December, they say they are fully committed to enacting cuts in January. Saudi Arabia cut production by 486,000 barrels per day to 10.058 million.

US oil rigs did rise by 4 rigs, per Baker Hughes, raising hopes that US producers can reverse US falling output. The oil rig count hit 529 getting back to where we were last year. We also saw the natural gas rig count jump by 3 to 135 rigs. Drillers need to add more rigs as decline rates are starting to hit the shale patch hard. They must drill more to stay even with production and must keep increasing rigs to get ahead of the decline rate. Right now the increase in rigs is far short of what US drillers must do to make up for OPEC cuts. Per the U.S. Energy Information Administration, U.S. production fell to 8.9 million barrels a day last year, a decrease of 5.3%.

Gas prices are on the rise but as bad as that is, it is worse in Mexico. Trilby Lundberg of the Lundberg Survey reported that the average price of regular-grade gasoline has gone up 12 cents over the past three weeks, to $2.38 a gallon. That puts us 33 cents above year ago, levels per Trilby. While that may be a big price spike in gas prices, in Mexico the gas price spike caused riots last week. Premium prices rose by over 20% and other grades to a lesser extent as Mexico lifted its subsidy causing protests and anger and now riots.