US Dollar Could Impact Crude Oil Prices in 2Q17

Crude oil prices 

WTI (West Texas Intermediate) crude oil (SCO) (PXI) (IEZ) futures contracts for May delivery fell 0.1% and were trading at $50.5 per barrel in electronic trade at 4:45 AM EST on April 3, 2017.

Crude oil prices are trading near a one-month high. Broader markets such as the S&P 500 (SPY) (SPX-INDEX), Dow Jones, and NASDAQ Composite Index are near all-time highs. Bullish momentum in the US stock market could support oil demand and oil prices. For more on crude oil prices, read Part 1 and Part 4 of this series.

US Dollar Could Impact Crude Oil Prices in 2Q17

US Dollar Index, the Fed, and President Trump

The US Dollar Index rose 1.3% to 100.2 on March 31, 2017, compared to previous week. The dollar hit a high of 103.8 on January 3, 2017—the highest level in 14 years. The dollar (UUP) rose due to the following factors:

  • the Fed’s interest rate hike by 25 basis points on March 15, 2017, to 0.75%–1%
  • improving US jobs market
  • expectations of fiscal stimulus and possible tax reforms under President Trump
  • expectations of rising US inflation
  • the Fed’s interest rate hike by 25 basis points on December 14, 2016, to 0.50%–0.75% 

US dollar’s performance

The US dollar fell 1.8% in 1Q17. It fell ~0.9% in March 2017 as President Trump failed to push the healthcare reform bill.

US dollar and crude oil

The US dollar and crude oil (XLE) (XOP) are usually inversely related. A fall in the US dollar makes crude oil more economical for oil importers. When the dollar falls, crude oil prices rise.

Volatility in crude oil prices impacts oil and gas producers’ earnings such as ConocoPhillips (COP), Noble Energy (NBL), Warren Resources (WRES), and QEP Resources (QEP).

Goldman Sachs (GS) predicts an interest rate hike in 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 key downside catalysts for crude oil prices in 2Q17 and 2017.

In the next part, we’ll discuss the energy calendar for this week.