Oil Futures Extend Slide as US Dollar Strengthens to 2-Mo High

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and the August Brent contract on the Intercontinental Exchange moved lower early Friday under pressure from a strengthening U.S. dollar that is climbing on an adjustment in U.S. monetary policy expectations, while Iranians head to the polls to vote for a new president.

Ebrahim Raisi, Iran's chief justice, is expected to win today's election for president, a hardliner under U.S. sanctions groomed by Iran's supreme leader Ali Khamenei. Raisi's expected win in a low turnout vote for the presidency diminished the likelihood that Washington would ease sanctions on Iranian oil exports, underpinning support for crude oil this week. Raisi has spoken against the nuclear accord known as the Joint Comprehensive Plan of Action reached in 2015 during the Obama administration, with the United States withdrawing from the JCPOA in 2018 under the Trump administration.

Multilateral talks in Vienna continued, with Washington and Tehran communicating through intermediaries. Tehran has refused direct talks with Washington until all sanctions on its economy and leaders are lifted.

Raisi, as chief justice, is said to have been involved in the 2009 crackdown on the Green Movement and in what have been called death panels in 1988 at the end of the Iran-Iraq war that led to as many as 5,000 killed. A Raisi victory does not mean an end to JCPOA negotiations, with negotiators this past weekend suggesting the framework of an agreement that returns the United States to the JCPOA has been reached. Raisi himself is keen on restating the deal which Iran is still a part of, although has enriched uranium above the threshold stated in the accord, as punishing sanctions executed under the Trump administration have crimped the Iranian economy. Reaching a deal would mean an end to U.S. sanctions that have choked off Iranian oil exports and led to a contraction of its economy, which is estimated to have shrunk 5% in 2020 and on course to contract by 7.6% this year.

The crude contracts are under pressure for a second session early Friday as a strengthening U.S. dollar amid an expected earlier hike in the benchmark federal funds rate than previously projected prompted repositioning. The Federal Open Market Committee's dot plot released Wednesday showed officials expect to make two increases in the overnight borrowing rate to 0.5% in 2023 from a zero to 0.25% range Friday, a year earlier than last communicated in March. FOMC officials are also more worried about inflation than in March, with 13 of the 18 members concerned over inflationary pressure compared with five three months earlier. In May, the consumer price index spiked 5% from a year earlier, well above the Federal Reserve's 2% target, and the fastest pace of inflation in 13 years.

FOMC members lifted the expected growth rate for the U.S. economy for 2021 from 6.5% in March to 7%, with inflationary pressure and a strong economy positioning the central bank to begin discussing tapering their $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities. The expected gradual tightening of monetary policy would lift borrowing costs and likely strengthen the U.S. dollar, which reached a fresh two-month high at 92.210 Friday morning.

The U.S. dollar has an inverse relationship with domestic oil, with July West Texas Intermediate futures down $0.70 near $70.30 per barrel (bbl) in early trading. July WTI options expire this afternoon, with the July futures contract set to expire Tuesday afternoon. August WTI futures were trading at a roughly $0.25 discount to the front-month contract.

August Brent crude on the Intercontinental Exchange was down about $0.75 near $72.35 bbl, continuing a retreat from this week's more than two-year high on the spot continuous chart at $74.39 bbl. Strength in the crude contracts coming into this week is underpinned by expectations for sharp growth in oil demand later this year, and the anticipated delay in Iranian oil exports.

Oil products futures were trading near three-week lows this morning, with building gasoline stocks tempering enthusiasm for robust summer demand. July RBOB futures were down 1.4 cent near $2.12 gallon, with July ULSD futures 0.95 cent lower near $2.0575 gallon.

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

Liubov Georges