Let's zoom into the ETF story first.
While this news may be bullish for the Crude Oil commodity itself, unfortunately, not for its refineries.
- So far in my articles, I have always assumed direct correlation between crude oil prices and its benefits to oil & gas companies. Higher energy prices translates to higher profits, and vice versa. So far, this direct correlation has been true due to the fundamentals of economics. The situation is direly different now.
- If you examine closely the components of DIG & DUG, both are either long/short the oil & gas companies, NOT the actual oil&gas commodities. As such, damages to oil&gas facilities which belongs to the refiners will adversely impact its production capacity and incur losses on the part of the companies.
- While the crude oil prices will surely rises in the case of reduced production capacity, the oil & gas companies are unable to profit from the rising oil prices due to the damages to their oil rigs which harvest the expensive oil (damage assessment during Katrina - similar category hurricane in 2005 - is huge and is available at this link)
- This is part of the reason why you've seen the DUG rises while crude oil price rises. Market is finally getting the sense of this sentiment.
- In short, Ultrashort Oil&Gas ETF has more potential upside and the reverse for its long counterpart.
What does this have to do with the US Dollar ?
- Precisely the point, NOTHING.
- The market has been so attached with the fact that rising crude oil is attributed to the weak dollar and the stronger USD will therefore cause prices of oil to go down. This correlation will be broken soon.
- USD fundamentals remain strong (more due to external factors than internal) and will continue to do so unless there are signs of reversal in ex-USA economies, especially the Euro-zone.
- Perhaps, this is a new environment where the strengthening of USD will go alongside the strengthening of crude oil price.
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