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Will the Fed and US Dollar Impact Crude Oil Prices?

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Crude oil prices 

April WTI (West Texas Intermediate) crude oil (USO) (UCO) (BNO) futures contracts rose 1.7% to $48.5 per barrel in electronic trade at 5:05 AM EST on March 15, 2017. Prices rose due to the API’s (American Petroleum Institute) bullish crude oil inventory report.

Broader markets like the S&P 500 (SPY) (SPX-INDEX) and the Dow Jones Industrial Average (DJIA-INDEX) are near all-time highs. Bullish momentum in the US stock market could support oil demand and oil prices. The US is the largest crude oil consumer. For more on crude oil prices, read Part 1 of this series.

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US Dollar Index, the Fed, and President Trump

The US Dollar Index rose 0.3% to 101.6 on March 14, 2017. Traders are focusing on the Fed’s meeting on March 15, 2017. CME FedWatch surveys project that there’s a 90.8% probability of the Fed raising the interest rate between 0.75% and 1% on March 15, 2017. It would support the US dollar. However, some traders think that the US dollar is already pricing in the rate hike. The dollar hit a high of 103.8 on January 3, 2017—the highest level in 14 years. The dollar (UUP) had been rising due to the following factors:

  • better-than-expected US jobs report in February 2017
  • expectations of fiscal stimulus and possible tax reforms under President Trump
  • strong US economic growth outlook
  • improving US inflation
  • the Fed’s interest rate hike by 25 basis points on December 14, 2016, to 0.50%–0.75% 

US dollar and crude oil  

The US dollar and crude oil (IEZ) (PXI) are usually inversely related. A rise in the US dollar makes crude oil more expensive for oil importers. When the dollar rises, crude oil prices fall.

Volatility in crude oil prices impacts oil and gas producers’ earnings such as Marathon Oil (MRO), Devon Energy (DVN), Laredo Petroleum (LPI), and Carrizo Oil & Gas (CRZO).

Goldman Sachs (GS) predicts an interest rate hike in March 2017, June 2017, and September 2017. The expectation of multiple interest rate hikes in 2017 could push the dollar higher. The strong US dollar is expected to be one of the downside catalysts for crude oil prices in 2017 along with major bearish drivers.

Next, we’ll look at the API’s estimates for US crude oil inventories.

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