Whenever oil prices go up (or down) news outlets always provide a glib explanation for why the move occurred.

Market pundits will blame one or more of the following: OPEC’s decision to increase (decrease) production; the falling (rising) value of the US dollar; increasing (decreasing) volumes of oil in storage; rebel attacks in Nigeria (Iraq); increased (decreased) refinery activity; increased (decreased) speculation in the oil market by hedge funds, pension funds, or other investors, who are buying (selling) long (short) positions; increased (decreased) volumes of spare production capacity; and finally, increased (decreased) economic activity.

This rampant speculation about prices has inured listeners to the reality of the modern oil market. And that reality is this: no one – repeat, no one – can explain why the oil market does what it does. The market is so big and complicated that even the smartest market analysts are, when it comes down to it, only guessing about what is driving price changes. In June 2009, Tim Guinness, a mutual fund manager, admitted as much when he wrote “The oil price is never rational.” He went on, “short-term spikes and troughs will continue to surprise us.”

Now, that’s a long list of caveats before getting to the point: over the past few years, there has been a strong correlation between the value of the dollar and the price of oil. As the value of the dollar relative to the Euro has weakened, the price of oil has increased. For instance, the peak in oil prices at more than $140 per barrel in July 2008, coincided with the peak in the value of the Euro against the dollar. In the fall of 2008, as the financial crisis hit and more investors began buying dollars, the price of oil declined. And in recent months, as the Euro has strengthened against the dollar, oil prices have risen.

As stated above, myriad other factors are involved in the price of oil. But on Wednesday, Adam Sieminski, the chief energy economist for Deutsche Bank, gave his forecast for the future value of the dollar, and in doing so, provided a view that runs counter to much of today’s conventional wisdom.

During an energy conference at Fort McNair in Washington, DC that was hosted by the National Defense University and the Institute for National Strategic Studies, Sieminski displayed a slide which showed the correlation between the value of the dollar and oil prices. When asked how Deutsche Bank sees the value of the dollar going forward, he replied that the bank’s currency analysts believe that the dollar will likely “bottom out over the next two years and then it becomes stronger.”

Sieminski said several long-term factors are weighing in favor of the dollar over other currencies including: the responsiveness of the US political system, the safety and strength of US capital markets, the education and technological capabilities of the American population, and finally, he said, “the US has a large population and it’s still growing.” That last factor provides a sharp contrast to much of Europe, where the population is aging and the population is flat or declining. The combination of all of those factors bodes well for the dollar, said Sieminski, and “that implies that oil prices will be lower over the long term.”

Sieminski’s comments were seconded by Richard H. Jones, the deputy executive director of the International Energy Agency. Jones, who served for many years in the US diplomatic corps before joining the IEA, added that the US has another advantage which favors a stronger dollar: “We are a continental country with no enemies at our borders.”

Of course, many other factors are going to affect the price of oil. But it’s worth noting that contrary to the belief that the US dollar is doomed, some of the smart people on Wall Street are saying that the dollar will rally in the years ahead. Whether that strength will actually keep a lid on oil prices is anyone’s guess.

Original text available here: http://www.energytribune.com/articles.cfm?aid=2395