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Crude Oil Prices Fall: Strong Dollar and Oversupply to Blame

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Crude oil prices 

June WTI (West Texas Intermediate) crude oil futures contracts trading on NYMEX (New York Mercantile Exchange) fell by 0.85% and closed at $47.75 per barrel on Friday, May 20, 2016. Brent crude oil futures trading on ICE (Intercontinental Exchange) fell by 0.18% to $48.72 per barrel.

Crude oil prices fell due to profit-booking and a strong dollar. The United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO) fell by 0.34% and 0.86%, respectively, on May 20.

[marketrealist-chart id=1327061]

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US Dollar Index 

The US dollar appreciated by 0.1% against major currencies on Friday, May 20, 2016. It rose 0.8% in the previous week and 2.3% in the last two weeks. This was due to expectations of an interest rate hike by the Federal Reserve in June 2016. Market surveys project a 30% likelihood of a hike in June and a 73% likelihood by the end of 2016.

On May 20, the US Dollar Index hit the highest level since March 2016. The US dollar is inversely related to crude oil. The appreciating US dollar makes crude oil expensive for oil importing countries. The PowerShares DB US Dollar Bullish ETF (UUP) tracks the performance of the US Dollar Index. In the above graph, you can see the UUP and USO relationship between the US dollar and crude oil.

Contract expirations

June WTI crude oil futures contracts expired on May 20, 2016. Traders squared off their long positions due to the expiration. Also, traders booked profits as crude oil prices are trading close to 2016 highs. High crude oil prices affect oil producers such as Bill Barrett (BBG), Cobalt International Energy (CIE), and Denbury Resources (DNR).

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Oversupply 

Russian Energy Minister Alexander Novak stated that supply outstripped demand by 1.5 MMbpd (million barrels per day) in the current crude oil market. Oversupply will put pressure on crude oil prices. Consequently, Brent crude oil prices fell for the third consecutive day. Read What Are the Key Bearish Drivers for Crude Oil Prices in 2016? to learn more about bearish drivers.

Volatility of crude oil prices

WTI crude oil prices have risen more than 80% from their 13-year lows. Brent crude oil prices have risen more than 85% from their lows in February 2016. WTI and Brent prices hit 2016 highs on May 17, 2016. Read Why Crude Oil Prices Rose 84% since the Lows in February 2016 and How Will China and India Impact the Crude Oil Market in 2016? for more on bullish drivers.

The volatility in oil prices affects ETFs and ETNs such as the iShares US Oil Equipment & Services (IEZ), the ProShares UltraShort Bloomberg Crude Oil (SCO), the ProShares Ultra Oil & Gas (DIG), the Direxion Daily Energy Bear 3x ETF (ERY), and the Fidelity MSCI Energy ETF (FENY).

Series focus 

This series focuses on Cushing crude oil inventories, the US crude oil rig count, the U.S. Commodity Futures Trading Commission’s Commitments of Traders report, and the crude oil price forecast.

Let’s start with Cushing crude oil inventories and why they’ve hit all-time highs.

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