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Is US Dollar Stalling the Rally in Crude Oil Futures?

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Feb. 5 2018, Published 8:51 a.m. ET

Crude oil futures  

March WTI crude oil futures contracts fell 0.86% to $64.89 per barrel at 12:05 AM EST on February 5, 2018. The recovering dollar and near-record US crude oil production have been weighing on oil prices.

Oil prices are near a three-year high, which favors the Energy Select Sector SPDR ETF (XLE) and the Vanguard Energy ETF (VDE). XLE and VDE fell 4.1% and 4.3%, respectively, on February 2, 2018.

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US dollar 

The US Dollar Index appreciated 0.6% to 89.19 on February 2, 2018. The dollar appreciated to due to better-than-expected US jobs data. On February 2, 2018, the Department of Labor reported that US non-farm payrolls increased by 200,000 in January 2018—compared to the previous month. Analysts estimated an increase of 180,000 during the same period.

The unemployment rate was at 4.1, which was the lowest level since 2000. Meanwhile, average hourly earnings increased 2.9% from a year ago—the highest increase since June 2009. Higher hourly earnings supported the US dollar and pressured crude oil prices.

US crude oil futures contracts fell 0.53% on February 2, 2018. Moves in oil prices impact ETFs like the PowerShares DB Oil Fund (DBO) and the VelocityShares 3x Long Crude Oil ETN (UWT). DBO and UWT fell 1.4% and 4.3%, respectively, on February 2, 2018.

Lower oil prices have a negative impact on energy producers like W&T Offshore (WTI), California Resources (CRC), and SN Energy (SN). These stocks fell more than 10% on February 2, 2018.

US dollar’s lows and highs 

The US Dollar Index hit 88.55 on February 1, 2018—the lowest level since December 2014. On the other hand, the US dollar tested 103.8 on January 3, 2017—the highest level in 14 years.

The Power Shares DB US Dollar Bullish ETF (UUP) rose 0.6% to 23.2 on February 2, 2018. UUP tracks the US dollar’s performance.

Impact 

The US Dollar Index depreciated ~9.8% in 2017. In contrast, US crude oil prices gained ~12.4% in 2017—partly due to the weak dollar.

The Fed might hike the US interest rate three times in 2018, which is bullish for the US dollar. However, the improving economy outside the US could see the US dollar lag compared to its peers. Major central banks could raise interest rates in 2018. Moves in the US dollar could impact oil prices.

Next, we’ll discuss US crude oil production.

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