Rising tensions between Iran and the West are overwhelming a bedrock principle that has dominated the oil market for nearly a decade: Oil prices move in the opposite direction of the dollar.
U.S. oil prices have climbed 12% since early November, with most of those gains coming after U.N. inspectors issued a report saying they suspected Iran was renewing efforts to produce nuclear weapons. The dollar also has strengthened over that period, gaining 4.8% as measured by the ICE U.S. Dollar Index, which weighs the dollar against a basket of other currencies.
The shift has occurred amid a collision between the two investments: The surge in oil prices, caused by fears Iran could block oil shipments or halt production in the event of military conflict, coincided with a deepening of Europe's debt crisis, which bolstered the dollar as the euro flagged. It is unusual because a higher dollar makes dollar-denominated oil more expensive for those buying in other currencies, reducing demand.
It has thrown some trading strategies into disarray. John Kilduff, founding partner of hedge fund Again Capital, says he has at times adjusted his firm's position in oil futures daily based on movements in the dollar, but began disregarding it in December as Iran tensions drove oil prices up and the pairing no longer held. Without the indicator to guide investment direction, his fund has trimmed oil holdings 20%.