by Calculated Risk on 8/08/2008 01:09:00 PM

Oil continues to sell off, and is now below $114 per barrel (Brent Crude Oil nearest futures)

Meanwhile the dollar is rallying.

These are two important stories.

As I noted late last year, the dollar had fallen enough to make a significant dent in the ex-petroleum trade deficit. Unfortunately for the trade deficit, oil prices were surging.

Click on table for larger image in new window.

This graph shows the U.S. trade deficit through May. The blue line is the total deficit, and the black line is the petroleum deficit, and the red line is the trade deficit ex-petroleum products. The current probable recession is marked on the graph.

The oil deficits in June, July and probably August will be ugly, but it now looks like the oil deficit will decline sharply later this year. Although there are other factors that impact exchange rates, this decline in oil prices will have a significant impact on the overall deficit, and might mean the dollar has finally bottomed (heresy to some I know!).

Note: import oil prices are calculated when oil is delivered, so there is a lag between future prices and import prices.