Rising dollar hurts crude markets
Crude oil prices fell on Tuesday by nearly $1 per barrel as the dollar strengthened to a two-year high, even as supply concerns remain after Libya shut its oil fields due to political protests.
The international benchmark Brent crude futures fell 0.98 per cent to $112.06 per barrel, and US crude futures fell over 1 per cent to $107.11 a barrel.
Both the contracts rose 1 per cent in the previous session tracking the loss of supply from Libya and expectations for oil demand from China, which has reopened its factories after shutting them down in Shanghai for nearly three weeks.
But gains in crude were limited by the fresh surge in the dollar to a two-year high. A stronger dollar hurts oil buyers holding other currencies.
On Tuesday, the dollar rose to a fresh two-year high, tracking higher US Treasury yields, underscoring inflation risks. Investors braced for multiple half a percentage-point rate hikes from the Federal Reserve.
The US rate futures market has priced in a 96 per cent chance of a 50 basis-point tightening at the Fed policy meeting in May and about 215 basis points of cumulative rate increases this year, providing ample support for the dollar.
“The dollar index in the last few sessions has been inching higher on the back of prospects that the Federal Reserve could adopt a more aggressive rate hike process than estimated earlier. The Fed has already begun raising rates this year, and rising inflation is one factor supporting the view for more rate hikes,” said Gaurang Somaiya, Forex & Bullion Analyst at Motilal Oswal Financial Services.
“The Fed minutes released earlier suggest that officials at the central bank have also started to discuss balance sheet trimming, another tool to manage its fight against inflation. Going ahead, hawkish stance by the Federal Reserve is likely to extend gains for the greenback,” he added.
But supply concerns still remain and have kept oil prices above $100 for the most part since Russia invaded Ukraine in late February.
That even as China continues to impose strict curbs to contain COVID outbreaks.
“We are still in a tractor pull between global supply deficits and China’s COVID demand crunch at the end of the day,” SPI Asset Management’s managing director, Stephen Innes, said in a note.
The prospects of a European Union ban on Russian oil for its invasion of Ukraine have also weighed on investors.
“Market sentiment was supported by the Russian minister saying more countries banning Russian oil imports would mean oil prices exceeding historic highs,” ANZ Research analysts said in a note, reported Reuters.
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