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How the Fed Could Pressure the Crude Oil Market in 2016

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The Fed

The Federal Reserve, also known as the Fed, increased the interest rate on December 16, 2015. This was the first change since 2006. The Fed increased the interest rate by 0.25% to 0.5% on Wednesday. The US Dollar Index (UUP) priced in the interest rate hike decision. The US Dollar Index appreciated by 11% in 2015 due to the improving US economy and consensus of interest rate hike by the Fed.

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The dollar and crude oil

Crude oil is a globally traded commodity, so it’s denominated in the US dollar. The US dollar and crude oil are inversely correlated. The appreciation of the US dollar makes crude oil less affordable for crude oil importing economies. On the other hand, the depreciation of the US dollar makes oil economical for oil importing countries in their local currency.

Crude oil in 2016 

Market experts suggest that the next interest rate hike could take place in April 2016. The median target for the interest rate in 2016 is expected at ~1.38%. The survey conducted by Reuters on December 9, 2015, projected that US interest rates could range between 1% to 1.25% in 2016, and are expected to rise by 2.25% by the end of 2017. The US expects GDP to grow by 2.2% in 2015 and 2.4% in 2016.

An improving US economy coupled with a consensus on an appreciating US dollar mean more pain for crude oil producers and oil prices. The inversely correlated crude oil fell 34% in 2015 compared to an 11% rise in the US dollar in 2015. Oil companies like ConocoPhillips (COP), Continental Resources (CLR), Hess (HES), ExxonMobil (XOM), and Pioneer Natural Resources (PXD) are pushing to keep the crude oil export ban. These companies could be affected by the appreciating US dollar. The crude oil contango market traders will also be affected by the rising interest rate. Read the next part of the series to know more.

ETFs like the United States Oil Fund LP (USO) and the iShares US Oil Equipment & Services ETF (IEZ) are impacted by ups and downs in the crude oil market.

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