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Crude Oil Market: US Dollar Hits 8-Month High

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Crude oil and the US dollar

The US dollar appreciated against global currencies on Friday, November 27, 2015. The US Dollar Index hit an eight-month record of 100.2 on Friday and rose 3.3% for the month due to speculation of an interest rate hike by the Federal Reserve. By contrast, West Texas Intermediate (WTI) January crude oil futures fell more than 10% in November 2015. This was the biggest monthly fall since July 2015. Crude oil prices fell due to the slowing Chinese economy and speculation of rising production from Libya and Iran in the glut oil market.

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Dollar and crude oil relationship 

The US dollar is a universal currency. As a globally traded commodity, crude oil is denominated in US dollars. Thus, the appreciation of the dollar makes crude oil expensive for oil-importing nations. Oil prices sometimes fall when the dollar rises. In contrast, depreciation of the dollar makes oil more affordable for oil-importing countries, which can lead to a rise in oil prices.

Outlook for the dollar and crude oil

The dollar is expected to rise due to a possible interest rate hike from the Federal Reserve. Secondly, loose monetary policy from China could benefit the dollar further. The continuing plans of stimulus packages from the European Central Bank and Japan will add to the dollar’s advantage as an attractive investment tool. Hedge funds and traders are bullish on the US dollar. The consensus of an appreciating dollar should put pressure on crude oil prices.

This would negatively affect oil producers like Murphy Oil (MUR) and Noble Energy (NBL). In contrast, lower oil prices benefit US refiners such as Tesoro (TSO) and Valero Energy Corporation (VLO). ETFs such as the First Trust Energy AlphaDEX Fund (FXN) and the iShares US Oil Equipment & Services ETF (IEZ) are also affected by uncertainty in the energy market.

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