Oil Futures Sell Off as Fed's Hawkish Shift Rallies US Dollar

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Nearest delivery oil futures on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange plunged in afternoon trade Thursday, pressuring West Texas Intermediate futures to $71 barrel (bbl) amid a quickly strengthening U.S. dollar after the Federal Reserve signaled near-term plans to taper its $120 billion a month in purchases of government bonds and mortgage-backed securities and raise interest rates earlier than previously indicated.

The U.S. Dollar Index notched some of the biggest gains in 2021 during the past two sessions, rallying 0.8% against a basket of foreign currencies to 91.873 Thursday, while weighing on the U.S. crude benchmark. West Texas Intermediate has an inverse relationship with the greenback. After reaching its highest trade since October 2018 at $72.96 bbl on Wednesday, WTI futures made a sharp U-turn, losing more than 1% Thursday.

Currency traders suggest the continuation of the upward momentum by the greenback is likely, with the immediate upside target at 92. The greenback's strength follows the hawkish shift in tone following this week's Federal Open Market Committee meeting, with the release of their Summary of Economic Projections Wednesday afternoon showing the likelihood of two rate hikes in 2023 amid a faster-than-previously thought rise in consumer prices and economic growth. The Fed has significantly raised its inflation forecast this year to 3.4% compared to the previous estimate in late March of 2.4% and boosted its gross domestic growth projections to 7% this year.

Federal Reserve Chairman Jerome Powell suggested at a news conference following the two-day FOMC meeting Wednesday afternoon that central bank officials would hold a conversation about tapering the $120 billion in monthly purchases during future meetings as the economy rebounds from the coronavirus-induced recession more quickly than envisioned. The central bank first began its massive bond-purchasing program in March 2020, when the pandemic led to orders to lock down businesses that caused unemployment to spike to 20.5 million in May 2020.

"Factors related to the pandemic, such as caregiving needs, ongoing fears of the virus, and unemployment insurance payments appear to be weighing on employment growth. These factors should wane in coming months against a backdrop of rising vaccinations leading to more rapid gains in employment," said Powell, noting the central bank is closely tracking the difficulties in returning workers to the workforce despite a record 9.3 million available jobs.

U.S. weekly jobless claims unexpectedly increased during the week ended June 12, totaling 412,000 compared with estimates for a fall to 360,000. All of the increase essentially came from two states -- Pennsylvania, up 21,590, and California, up 15,712.

On the session, NYMEX July WTI declined $1.11 to $71.04 bbl and the international crude benchmark August Brent contract fell $1.31 to $73.08 bbl. NYMEX July RBOB futures dropped back 2.20 cents to $2.1342 gallon and July ULSD futures fell 3.66 cents or 1.8% to $2.0668 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges