What Strong Dollar?

US Boom Provides Oil Hedge

Source: Arb.ca.gov
The energy boom in the world's largest economy is providing a shock absorber for major U.S. oil
companies, helping to hedge a strong dollar as the increase in domestic production buffers them
from from currency volatility that can pinch earnings.

The relationship between oil prices and the greenbackwhich on Monday hovered close to near a
two-year high against a basket of its counterparts .DXYis complex, yet analysts say a rising dollar is
generally a modest negative for oil producing companies.

Crude is priced in dollars, and a strong U.S. currency puts downward pressure on crude, which helps
contain commodity inflation pressures that eventually get passed down to consumers.


Typically, that dynamic is less beneficial to the oil producers that thrive when the market is bidding
up prices. Although refineries can earn higher profit margins in an environment of low crude,
producers often suffer a drop in profits.

Thinks may be different now, however, and energy giants are downplaying the strong greenback's
impact on their operations. Mark Finley, BP BP.-GB America's general manager of global energy
markets and US economics, said in an e-mail reply to a question from CNBC that "oil prices are
primarily driven by oil market supply and demand fundamentals, rather than movements in the
dollaras is evident by the recent decline coming amid weak global demand and strong growth in
US production."

Some analysts already see a shift underway in the traditional relationship between crude and the
dollar. In a March research report, Bank of America-Merrill Lynch said with the U.S.'s growing energy
independence was causing the negative correlation between the dollar and oil to ease.

"If you're producing more and more here and you're doing exporting, the strong dollar effect is
reduced quite a bit," said Richard Hastings, a macro strategist at Global Hunter Securities. "You could
look it as a hedge or a bufferbut it avoids the import/export currency effect that brings into focus
the stronger dollar."

Although multinational oil giants ExxonMobil XOM, Chevron CVX and ConocoPhillips COP all
reported flat to weaker earnings in the first quarter, all three reduced overseas production while
ratcheting up exploration in domestic hotspots.

Chevron,the second-largest U.S. oil company by market value after Exxon, reported flat daily oil
production in the U.S. during the first quarterbut its international wells saw a drop of 2.5 percent.
Meanwhile, Exxon's U.S. oil production accounted for the majority of its product sales.

(Read more: US Oil Moves Inland, Making Storms Less Disruptive .)

The impact of a stronger dollar can be felt in more subtle ways. Fadel Gheit, senior analyst at
Oppenheimer & Co., said that while oil companies are "basically agnostic" on FX moves, a weak local
currency can inflate labor and operational costs in foreign markets like Europe and Australia.

"If they are paying local wages all of a sudden they see increases of 10-15 percent for the same
service," Gheit said. Yet with more production migrating to the U.S., wages and operations in foreign
markets may become less volatile.

"It is not really a game changer, but obviously in the budgeting process" currency levels are taken
into account, he added.