Oil futures dropped Thursday, with prices pulling back from the highest finish in more than two years as the U.S. dollar strengthened in the wake of a hawkish shift in tone by the Federal Reserve.
The dollar strengthened after Fed policy makers penciled in two rate hikes by the end of 2023 and discussed the eventual tapering of the central bank’s asset buying program. The ICE U.S. Dollar Index a measure of the currency against a basket of six major rivals, was up 0.8% at 91.83.
A stronger dollar can weigh on commodities priced in the currency, making them more expensive to users of other currencies, though pressure on crude was offset by strong demand expectations.
The rise in the dollar was certainly “a renewed headwind for oil and all commodities,” prompting some “cross-asset funds to lighten up on oil positions,” said Tyler Richey, co-editor at Sevens Report Research.
“Looking across commodities, it does seem like some cracks are emerging in the broader bull run,” he told MarketWatch, adding that “heavy action” in copper prices has “raised concerns about the health of the global economic recovery.”
That’s likely led to a “spillover effect that is pressuring oil today as the latest leg higher in energy markets was largely based on demand hopes, which would be invalidated if the economic rebound is losing steam,” said Richey.
West Texas Intermediate crude for July delivery lost $1.11, or 1.5%, to settle at $71.04 a barrel on the New York Mercantile Exchange. It eked out a gain of just 3 cents Wednesday to settle at the highest since October 2018.
August Brent crude the global benchmark, fell $1.31, or 1.8%, to $73.08 a barrel on ICE Futures Europe. On Wednesday, Brent logged its highest settlement since April 2019.
Oil had rallied ahead of the Fed statement Wednesday as government data showed a large drop in U.S. crude inventories, due in part to a rise in exports, which signaled that demand was picking up around the world, said Sophie Griffiths, market analyst at Oanda in a note, adding that optimism over demand fed a rise of around 11% for crude over the past four weeks.
Direction in the near term may also be dictated by U.S. output, analysts said. Data shows U.S. oil production, at 11.2 million barrels a day, is at its highest level since last May, noted Eugen Weinberg, commodity analyst at Commerzbank, in a note.
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“The speed at which production is being ramped up in the U.S. will dictate the direction of oil prices in the medium term: if U.S. oil production recovers more quickly than expected, this would undermine the pricing power of OPEC+ and allow the U.S., as a marginal producer, to become a price-determining factor again,” he wrote.
But that’s not what looks likely to happen, Weinberg said, noting that energy agencies “envisage a slow rise in U.S. production, which is more likely to support oil prices.”
“For now, the path of least resistance is higher for oil and the refined products and that will continue until we begin to see signs that demand growth is peaking or if there is some other sort of market shock that weighs on all risk assets,” said Sevens Report Research’s Richey.
Also on Nymex, natural-gas futures finished little changed after the U.S. Energy Information Administration reported that domestic supplies of natural gas rose by 16 billion cubic feet, or bcf, for the week ended June 11. The EIA said the data, however, included an adjustment to the week’s total to account for a reclassification of some gas stocks from working gas to base gas. Working gas is the volume of gas available in the market.
The “implied flow for the week is an increase of 67 bcf to working gas stocks,” the EIA said. On average, analysts polled by S&P Global Platts forecast an increase of 78 billion cubic feet in natural-gas stocks.