Crude Rally Pauses Amid Rate Hike Worries, Stronger Dollar

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are inching lower on Thursday, hovering just under yesterday’s multi-year high. Traders are blaming the early weakness on the stronger U.S. Dollar, which could reduce foreign demand for the dollar-denominated asset. The dollar has risen sharply since late Wednesday following signs that the Federal Reserve will tighten monetary policy soon.

At 08:20 GMT, March WTI crude oil futures are trading $87.24, down $0.11 or -0.13%. April Brent crude oil is at $89.92, down $0.04 or -0.04%. On Wednesday, the United States Oil Fund (USO) settled at $61.70, up $0.72 or +1.19%.

Strong US Dollar Could Cap Gain Temporarily

Crude oil futures could face short-term headwinds amid a broader decline in financial markets after the U.S. Federal Reserve signaled a March interest rate increase and as the U.S. Dollar climbed against a basket of major currencies. Dollar-denominated crude oil becomes more expensive for users of foreign currencies when the greenback appreciates.

The Federal Reserve on Wednesday said it is likely to hike interest rates in March and reaffirmed plans to end its bond purchases that month in what U.S. central bank chief Jerome Powell pledged will be a sustained battle to tame inflation. The U.S. Dollar rose on higher U.S. Treasury yields, lifting the U.S. Dollar Index to near a five-week high.

Geopolitical Tensions Raise Energy Supply Fears

Crude oil prices surged on Wednesday, with Brent jumping to $90 a barrel for the first time since 2015, amid tensions between Ukraine and Russia, the world’s largest oil producer, that have fanned fears of energy supply disruptions to Europe.

Despite the bullish reaction to the events, traders are still being cautious as the United States and European powers try to defuse the situation.

The U.S. said on Wednesday it had set out a diplomatic path to address sweeping Russian demands in Eastern Europe, as Moscow held security talks with Western countries and intensified its military build-up near Ukraine with new drills.

World power China even joined the conversation on Wednesday, telling the United States it wants to see all sides involved in Ukraine remain calm and avoid increasing tension while the United States stressed de-escalation and warned of the security and economic risks from Russian aggression.

Short-Term Outlook

Although bullish traders are taking a breather early Thursday, crude oil prices remain well-supported by tightening supply. Russian production could fall if there is a war with Ukraine, however, low Russian production is already helping to underpin prices.

Efforts by OPEC+, which includes Russia, to boost supply are not materializing as fast as planned and demand has not been hit as badly by the rapid spread of the Omicron coronavirus variant as earlier feared.

We’re looking for supply challenges and mounting Russia-Ukraine tensions to remain supportive for crude oil prices. Brent crude seems to be well on its way to $100 per barrel although well ahead of schedule.