How Will the US Dollar Affect Crude Oil Prices in 2017?

February 2017 WTI (West Texas Intermediate) crude oil (PXI) (ERX) (USL) (ERY) futures contracts rose 0.1% and settled at $53 per barrel on December 23, 2016. Brent crude oil futures contracts rose 0.2% and settled at $55.2 per barrel. For updates on crude oil prices in 2016, read part three of this series.

Crude oil prices rose due to the major oil producers’ production cut deal, which could curb oversupply in the market. OPEC (Organization of the Petroleum Exporting Countries) and non-OPEC producers agreed to cut crude oil production by 1.8 MMbpd (million barrels per day) from January 2017 onwards. However, oil trading was range-bound ahead of the Christmas holidays and is expected to be range-bound until next year. For more on the oil producer meeting, read part four of this series. A weaker dollar supported crude oil prices on December 23, 2016. The United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO) rose 0.9% and 1.6%, respectively, on December 23, 2016.

The US Dollar Index depreciated 0.1% to 103 on December 23, 2016. However, it hit 103.6 on December 20, 2016, the highest level in nearly 14 years. The US dollar has appreciated due to the Fed’s interest rate hike of 25 basis points on December 14, 2016, to between 0.50% and 0.75%.

The US dollar has appreciated due to the following factors:

• strong US economic growth outlook
• improving labor market
• expectations of rising US inflation
• expectations of fiscal stimulus following Donald Trump’s victory. Read Winners and Losers in Energy after the US Election Results and US Election: How Will It Impact the Stock and Energy Markets? for more on the election.

The US dollar has risen more than 20.0% in the last two years. The PowerShares DB US Dollar Bullish ETF (UUP) tracks the performance of the US dollar. It fell 0.1% to 26.6 on December 23, 2016.

The US dollar and crude oil are usually inversely related. A stronger US dollar makes crude oil more expensive for oil importers and vice versa. When the dollar rises, crude oil prices fall.

A recent survey suggests that the Federal Reserve could increase interest rates by 0.75% in 2017. The expectation of an interest rate hike could push the dollar higher. Volatility in the US dollar could affect crude oil prices in 2017. The strong US dollar is expected to be one of the key downside catalysts for crude oil prices in 2017.

Moves in crude oil prices can impact the earnings of oil and gas exploration and production companies such as Chevron (CVX), Whiting Petroleum (WLL), Swift Energy (SFY), Hess (HES), ExxonMobil (XOM), and Goodrich Petroleum (GDP).

The ups and downs in crude oil prices affect ETFs and ETNs such as the Vanguard Energy ETF (VDE), the Fidelity MSCI Energy ETF (FENY), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), the SPDR S&P Oil & Gas Equipment & Services ETF (XES), and the United States Brent Oil ETF (BNO).

In this series, we’ll focus on the major oil producer deal and its impact on oil prices in 2017, US crude oil highs and lows in 2016, Cushing crude oil inventories, the US crude oil rig count, and some crude oil price forecasts.

Let’s start with the energy calendar for this week.