Crude oil prices
February WTI (West Texas Intermediate) crude oil (PXI) (XOP) (XES) (IEZ) (ERX) (USL) (ERY) futures contracts fell 2.6% and settled at $52.33 per barrel on January 3, 2017. Brent crude oil futures contracts fell 2.4% and settled at $55.5 per barrel. For more updates on crude oil prices, read part three of this series.
Crude oil prices fell due to the strong dollar. Secondly, doubts over whether major oil producers will comply with planned production cuts also limited the upside for crude oil prices. 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) beginning in January 2017. The United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil (UCO) fell 2.4% and 4.5%, respectively, on January 3, 2017.
US dollar index, Federal Reserve, and Trump
The US dollar index appreciated 0.9% to 103.2 on January 3, 2017. It hit a high of 103.8 on January 3, the highest level in 14 years. The US dollar has appreciated due to the better-than-expected rise in US manufacturing activity. The index for US manufacturing activity rose to 54.7 in December 2016 from 53.2 in November 2016. A market survey had estimated that the index would have risen to 53.6 in December 2016.
The US dollar has been appreciating 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 Fed’s interest rate hike of 25 basis points on December 14, 2016, to between 0.50% and 0.75%
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 rose 0.9% to 26.7 on January 3, 2017.
US dollar and crude oil
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.
Volatility in crude oil prices can impact the earnings of oil and gas exploration and production companies such as Chevron (CVX), ExxonMobil (XOM), QEP Resources (QEP), Whiting Petroleum (WLL), Swift Energy (SFY), and Goodrich Petroleum (GDP).
It also affects ETFs and ETNs such as the Vanguard Energy ETF (VDE), the Fidelity MSCI Energy ETF (FENY), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the United States Brent Oil ETF (BNO).
For more on the crude oil market outlook in 2017, read What Can Investors Expect in the Crude Oil Market in 2017? and Decoding the World Oil Supply and Demand Gap in 2017.
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.
What’s in this series?
In this series, we’ll look at US crude oil highs and lows in the last 12 months, 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.