The surge in oil prices in 2004-2008 was exacerbated by falling USD foreign exchange (FX) rates. Similarly the 2014-2016 plunge in oil prices was aggravated by U.S. dollar strength. Inside, we present a history of oil prices adjusted for both inflation and broad-based USD FX variation. After such inflation and USD FX rate adjustments, the average price of oil since 1973 is $64/barrel (bbl). The West Texas Intermediate (WTI) oil price has recovered from its 2015-16 slump and averaged $63/(bbl) during 1Q18. Right now, the spot price is above its historic average on our inflation and USD adjusted basis. We expect the dollar to appreciate 3-5% from now as the Fed continues to hike over the coming year. We also think broad based inflation will stay tame. So we see some dollar headwind and only a small broad inflation boost to oil prices, which should leave prices driven by fundamentals. We think the ability of global supply to meet global demand over intermediate and longer-term periods is ample and we think geopolitical supply-side disruptions are unlikely to be large.
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