Crude oil prices are down so far today as a stronger U.S. dollar brought them off multi-year highs, although losses were limited due to a big drop in U.S. crude oil inventories.
The U.S. dollar gained its strongest single-day gain in 15 months. The gain came to be because of the Federal Reserve signaling it may raise interest rates at a much faster pace than assumed. The gain caused significant price movement but the commodity and currency market with many futures, which were bearish on the dollar, liquidated.
Because of the bullish nature of the U.S dollar, it is now more expensive in other currencies which may potentially weigh on the oil demand. Edward Moya, senior market analyst at OANDA stated, “Energy markets became so fixated over a robust summer travel season and Iran nuclear deal talks that they somewhat got blindsided by the Fed’s hawkish surprise.
This pullback in oil prices should be temporary as the fundamentals on both the supply and demand side should easily be able to compensate for a rebounding dollar”.
One of the factors that limited the losses from the bullish U.S dollar is the data from the Energy Information Administration (EIA) which showed that U.S. crude oil stockpiles dropped sharply last week as refineries boosted operations to their highest since January 2020. The EIA data showed a draw of 7.355 million barrels for the week. This indicates a continued improvement in demand.
Also, to note, refinery throughput in China, the world’s second-largest oil consumer, rose 4.4% in May from the same month a year ago to a record high which also indicates that an increase in demand for oil is imminent.
How FED decision affects oil
Although the dollar is bullish, it is expected that oil price will continue to trend upwards with continued fundamentals such as the Organization of Petroleum Exporting Countries and Allies (OPEC+) slowly easing in the supply of oil, increased vaccination effort in advanced economies, the G-7 promising to give 1 billion doses of the COVID-19 vaccine to developing countries and the delay in talks between the U.S and Iran.
The oil futures are recovering from a bearish Asian session. Brent crude oil is marginally down by 0.02%, currently trading $74.38 a barrel. It hit its highest since April 2019 in the previous session while the U.S. crude oil futures is also marginally down by 0.01%, currently trading $72.12 a barrel, after reaching their highest since October 2018 the previous day.
