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US Dollar near November 2016 Lows: Can It Support Crude Oil?

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Crude oil prices  

WTI (West Texas Intermediate) crude oil (XLE) (XOP) (USO) futures contracts for June delivery rose 0.2% and were trading at $46.5 per barrel in electronic trade at 6:25 AM EST on May 9, 2017.

Prices are near a five-month low. Broader markets such as the S&P 500 (SPY) (SPX-INDEX) and the NASDAQ 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 one and part four of this series.

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US Dollar Index, the Fed, and President Trump 

The US Dollar Index rose 0.42% to 98.9 on May 8, 2017. 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 of 25 basis points on March 15, 2017, to 0.75%–1%
  • improving US employment
  • expectations of fiscal stimulus and possible tax reforms under President Trump
  • 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 is down ~5% from its high on January 2017. The dollar is near a November 2016 low due to less-than-expected GDP growth in 1Q17 and weak labor productivity.

The US dollar and crude oil (ERY) (ERX) (XES) 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.

Changes in crude oil prices impact the earnings of oil and gas producers like ExxonMobil (XOM), Sanchez Energy (SN), and Goodrich Petroleum (GDP).

A market survey 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 2017.

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

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