While a weakening dollar can strengthen commodities like gold, it can also be an indirect play on oil through assets like the Invesco DB Oil Fund (DBO).

A weaker greenback means that other developed markets and emerging markets can purchase dollar-denominated assets like oil. In addition, tighter supply can keep oil prices elevated for some time.

According to a Reuters article: “Crude prices were supported by the decline in the U.S. dollar to a 19-week low versus a basket of currencies as inflation worries recede. A weaker dollar makes it less expensive for holders of other currencies to buy commodities priced in dollars, like oil.”

“Oil prices … remain at high levels as the high season for oil demand is approaching and as restrictions are lifted in much of Europe and the United States,” said Louise Dickson, oil markets analyst at Rystad Energy.

Up 40% this year, DBO seeks to track the DBIQ Optimum Yield Crude Oil Index Excess Return (DBIQ-OY CL ER), which is intended to reflect the changes in market value of crude oil. The single index Commodity consists of Light, Sweet Crude Oil (WTI). The fund invests in futures contracts in an attempt to track its corresponding index.

DBO Chart

A ‘Wait and See’ for Oil Prices

Oil prices are at a wait-and-see point with Iran and the United States negotiating a nuclear deal in Vienna this week. Analysts keeping a close watch on negotiations predict that an agreement could equate to an increased supply totaling about 1 million to 2 million barrels per day (bpd).

“Crude prices are in wait-and-see mode until the fifth round of negotiations to revive the Iran nuclear deal are done,” said Edward Moya, senior market analyst at OANDA. “Energy traders need to know how much Iranian crude is going to hit the market.”

In the meantime, DBO can also be used as a hedging tool against inflation. A rise in commodities like oil can help insulate rate increases should the Fed decide to shift its interest rate policy upward.

“This ETF provides exposure to light sweet crude oil (WTI), which is the most popular oil benchmark in the world,” an ETF Database analysis said. “Commodity exposure in a portfolio used to be a binary choice, either one invested in them, or they did not. Now, commodities have been proven as powerful inflation hedging tools with the power to generate powerful returns for an individual portfolio.”

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