Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19
Gold Price Gann Angle Update - 10th July 19
Crude Oil Prices and the 2019 Hurricane Season - 10th July 19
Can Gold Recover from Friday’s Strong Payrolls Hit? - 10th July 19
Netflix’s Worst Nightmare Has Come True - 10th July 19
LIMITLESS - Improving Cognitive Function and Fighting Brain Ageing Right Now! - 10th July 19
US Dollar Strength Will Drive Markets Higher - 10th July 19
Government-Pumped Student Loan Bubble Sets Up Next Financial Crisis - 10th July 19
Stock Market SPX 3000 Dream is Pushed Away: Pullback of 5-10% is Coming - 10th July 19
July 2019 GBPUSD Market Update and Outlook - 10th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

The Fed Is Driving Down Oil Prices

Commodities / Crude Oil Jun 20, 2018 - 07:06 AM GMT

By: OilPrice_Com

Commodities

The U.S. dollar has jumped to its strongest level in nearly a year, raising questions about how a strong greenback could act as a drag on debt and oil demand in much of the world.

The U.S. Federal Reserve announced another rate hike a few days ago, which helped edge up the dollar to a new high for the year.


The greenback has “a little room to run,” Kathy Jones, a New York-based chief fixed-income strategist at Charles Schwab, said in a Bloomberg interview. “We have seen softer numbers out of Europe and firmer numbers out of the U.S.” The U.S. Federal Reserve is unwinding its extraordinary monetary intervention after a decade of near-zero interest rates. The Fed has announced quarter-point interest rate hikes twice and is planning on at least two additional increases this year.

Meanwhile, the European Central Bank is heading in the other direction in an effort to keep sovereign bond yields from spiraling out of control, particularly after the recent political turmoil in Italy unnerved bond markets on the continent. The ECB said it would keep interest rates low through at least next summer.

The diverging policy paths for the two central banks points to a further strengthening of the dollar relative to the euro. The Bloomberg Dollar Spot Index jumped to 1,187 in early trading on Friday, the highest level since July 2017. The greenback has strengthened about 6 percent in the past two months.

“(ECB President Mario) Draghi came out a little bit more dovish than people thought he was going to be. And that really caused the euro to take a dip and the (U.S.) dollar to go up, which is putting downward pressure on prices,” Phil Flynn, analyst at Price Futures Group in Chicago, told Reuters.

There are plenty of factors influencing oil prices right now, and the OPEC+ decision expected in a few days will be the single most important driver in the near-term. But the U.S. dollar is one important variable influencing oil prices. A stronger dollar helps push down prices because it makes oil, which is priced in dollars, much more expensive in much of the world.

Moreover, emerging markets now account for a majority of oil demand, and nearly all of the growth in oil demand. More specifically, additional consumption over the next few decades is expected to overwhelmingly come from China and India. In 2018, the two countries have accounted for nearly 70 percent of oil demand growth.

As a result, actions from the Fed reverberate through the oil markets. Higher oil prices act as a drag on demand, but a stronger greenback magnifies the expense in local currency.

Some governments are desperate to shield their economies from higher prices. As Reuters notes, the price of a liter of diesel in India is up 27 percent from a year ago, which, while costly, is actually subdued given the 70 percent increase in Brent prices over that time period. The Indian government is stepping in to blunt the impact of higher fuel prices, at great expense to public coffers.

The IEA said last week that oil demand is set to grow by 1.4 million barrels per day (mb/d) in each of 2018 and 2019, although that forecast was vulnerable to several potential pitfalls. “Of course,there are downside risks: these include the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar,” the IEA wrote.

We have already seen some flashpoints flare up this year as a result of both higher fuel prices and currency problems, and while there are always multiple causes to such events, the strength of the U.S. dollar cannot be discounted. In Argentina, the peso lost nearly a quarter of its value relative to the dollar, forcing the government to seek a financial rescue from the IMF. In Brazil, crippling protests over high fuel prices paralyzed the country – prices were particularly painful for the truckers staging the strikes because Brazil’s currency lost nearly 15 percent of its value relative to the dollar, exacerbating the rise in oil prices.

“Currency risks are also mounting for several emerging market economies and some OECD countries,” the IEA wrote in its report. “For example, between the start of April and the end of May, the Argentinian peso has depreciated by 24% versus the US Dollar, the Brazilian real by 12.6%, the Mexican peso by 9.7%, the Russian ruble by 9.2%, the Turkish lira by 14.4%, the South African rand by 7.3% and the euro by 5.4%.”

This currency turmoil threatens oil demand growth. “These depreciations forced some countries to increase interest rates to defend their currency, which could weigh on growth in due course,” the IEA concluded.

Source: https://oilprice.com/Energy/Energy-General/The-Fed-Is-Driving-Down-Oil-Prices.html

By Nick Cunningham of Oilprice.com

© 2018 Copyright OilPrice.com - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules