Oil Price Fundamental Daily Forecast – Fed Rate Hike Concerns Support Dollar, Cap Crude Oil Gains
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading flat early Tuesday after plunging over 3% the previous session.
With a lot of conflicting information on their table, traders took the easy route by following U.S. stocks lower on Monday. Essentially, traders shed riskier assets as Treasury yields and the U.S. Dollar rose in reaction to U.S. service sector data that raised concerns that the Federal Reserve could continue its aggressive policy tightening path.
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At 08:17 GMT, January WTI crude oil futures are trading $77.42, up $0.49 or +0.64% and February Brent crude oil is at $83.30, up $0.62 or +0.75%. On Monday, the United States Oil Fund ETF (USO) settled at $67.70, down $2.14 or -3.06%.
Price Action Fueled by Macro-Economic Jitters
After weeks of following events like COVID restrictions in China, OPEC+ production levels and the European Union cap on Russian oil, crude oil traders turned to macro-economic data and its impact on Fed policy for guidance on Monday.
Although traders ignored Friday’s red hot non-farm payrolls report and its potential impact on Fed interest rate decisions, they couldn’t layoff the unexpected pick-up in U.S. services industry activity reported on Monday.
Both reports indicate the economy is still strong and possibly growing which could have an impact on next week’s Federal Reserve interest rate decision. The Fed is widely expected to raise rates by 50 basis points on December 14, but investors aren’t sure when the central bank will stop raising rates and at what level.
Expectations of higher rates drive Treasury yields higher, creating demand for the U.S. Dollar. A stronger greenback tends to weigh on foreign demand for dollar-denominated crude oil. This is likely the main reason prices fell on Monday.
Other Influences Taking a Backseat to the Stronger Dollar
With the OPEC+ production decision in the books until at least February 1, traders are likely to split their attention between the already discussed Fed policy, the easing of China’s COVID restrictions, the Russian supply cap and U.S. supply levels.
News of China easing COVID curbs drove prices higher early Monday. Since prices fell later in the session, I think it’s safe to say bullish investors want to see more progress toward opening up the economy.
The early reaction to the European Union’s cap on Russian sea-borne oil drew mixed results. Traders seem to be confused about how it’s going to work. On paper, it looks bullish since supply is likely to be reduced.
Finally, U.S. stockpiles have plunged the past two weeks as refineries step up activity. Prices could be supported this week if the trend continues. On Tuesday, the American Petroleum Institute (API) will reveal its weekly results. This will be followed by Wednesday’s U.S. Energy Information Administration (EIA) weekly inventories report.