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Will A Fed Rate Hike Boost The Price Of Oil?

By Ellen R. Wald, Ph.D.CommoditiesMar 15, 2017 05:36AM ET
www.investing.com/analysis/will-a-fed-rate-hike-boost-the-price-of-oil-200178934
Will A Fed Rate Hike Boost The Price Of Oil?
By Ellen R. Wald, Ph.D.   |  Mar 15, 2017 05:36AM ET
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Later today we will likely hear that the United States Federal Reserve will raise interest rates, perhaps more than was expected just a few weeks ago. What will this do to the price of oil, which is currently in a weeklong slide?

When the value of the U.S. dollar increases, the global price of oil drops, because oil is most commonly sold in dollars. A more valuable dollar can buy more oil. Conversely, a weakened dollar buys less oil, so when the dollar depreciates the global price of oil rises.

What, then, does an increased interest rate do to the value of the dollar? The standard academic answer has been that increased interest rates cause an appreciation of the dollar. However, the U.S. Federal Reserve Bank of St. Louis notes that the historical record indicates otherwise. In a very clear explanation, economist YiLi Chien and analyst Paul Morris note that interest rate hikes cannot be used to forecast the movement of the dollar’s value in the short term. If anything, “there is weak evidence that a high-interest-rate currency actually has a tendency to appreciate.”

If and when the Federal Reserve raises interest rates, oil speculators may very well operate under the assumption that the interest rate hike will cause the dollar to appreciate. Alternatively, some expect speculators to act in the opposite direction. If speculators forecast a depreciated dollar, they will buy into oil and may cause a price bump.

The opposite would happen if they forecast a dollar appreciation. However, the historical record shows that there is no way to predict how the dollar will react to an interest rate hike. In other words, the Federal Reserve’s actions cannot be used to accurately forecast the direction of oil pricing.

Investors should continue to focus on production levels, particularly:

  1. Saudi Arabia’s recent announcement that it raised its production in February (which they say will be placed in storage, not exported);
  2. Expectations for increased gasoline production in the U.S. which will draw down the high levels of stored crude; and
  3. Russia’s commitment to the production cut agreements
Will A Fed Rate Hike Boost The Price Of Oil?
 

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Will A Fed Rate Hike Boost The Price Of Oil?

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Girish gupta
Girish gupta Mar 16, 2017 5:28AM ET
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excellent
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Do Deikins
DoRight Mar 15, 2017 11:57PM ET
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Perhaps a site should start that is called the 'Oil Joke of the Week'. A sound bit of misdirection by the Saudi Oil Ministry, if I have ever heard one, saying that you can't count the oil they are putting into storage as production. Does that mean that the oil buildup in Cushing is of no interest to oil prices. Or what about the draw-down of the Iranian tanker oil reserves by close to 50% in January. Conversely they said that couldn't be counted as production since it was coming from storage. Or am I missing something?
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Do Deikins
DoRight Mar 15, 2017 11:57PM ET
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Or was the announcement of the oil production increase (albeit placed in "storage") by the Saudi Oil Ministry combined with their statements at CERAweek, a shot over the bow to the shale producers that they also can increase production rapidly if they desire.
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Raymond Chan
Raymond Chan Mar 15, 2017 1:21PM ET
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US itself is the oil dominating country, so-called manipulator as Trump's saying goes.
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Mar 15, 2017 11:48AM ET
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The dollar is a red herring. It's all about oil (over)supply and demand.
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D D
D D Mar 15, 2017 10:39AM ET
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Great article, Ellen. Always to the point. Thank you.
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Tony Mahomi
Tony Mahomi Mar 15, 2017 9:24AM ET
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If the Federal rise the interest , oil price goes up!
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Joice Juice
Juice Mar 15, 2017 8:53AM ET
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what????????? Your assumption is purely based on physical trade assumption,,, and Oil market react little or late to the actual fundamentals. It is speculation that mostly drives the market, not the actual trade. If your assumption is right, then the 'Yuan' should have appreciated when Trump was elected, not dollar. and when you said "A more valuable dollar can buy more oil. Conversely, a weakened dollar buys less oil, so when the dollar depreciates the global price of oil rises.", This doesn't make any sense.... This is why talking heads with PhD degrees can never understand the market. The impact of value of dollar on Oil must be considered with different time horizon and other economic and political factors. you can't just assume it with the value of dollar. As the Fed increase the rate, this will definitely bring the capital around the world to the US. Its not like back in year 2001 or 2008, we have too much risks around the world either politically or economically.
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Shane Quillen
Shane Quillen Mar 15, 2017 8:53AM ET
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If 1 dollar today gets you a candy bar and next week dollar loses half its value. That candy bar should cost 2 dollars at that time. Plain talk is easy understood. No phd
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Joice Juice
Juice Mar 15, 2017 8:53AM ET
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LOL you are right on that, but this is not simple as candy bar........ and even the candy bar's price can go up or down even the value of the dollar loses half. That's typical keynesian theory and that's how we leaned in schools. But the textbook style economics won't make us good economists or traders.
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Anacársis Cita
Anacársis Cita Mar 15, 2017 8:38AM ET
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To sum up, the hike in interest rates will gonna make the oil fall on dollars, but it doesn't mean that oil will gonna worth less, just means the dollar will gonna worth more related to everything else.
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Timochin Khan
Timochin Khan Mar 15, 2017 8:36AM ET
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As always, well done....
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Richard Bates
Richard Bates Mar 15, 2017 8:15AM ET
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What about bitcoin I think it will rise today to higher.
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Rawand Tawfeeq
Rawand Tawfeeq Mar 15, 2017 8:10AM ET
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It's basic science, higher interest rate means people will put borrow less and put more money in the banks which gonna cause less dollar in the market, less Dollar in the market leads to demand>supply
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Asim Ali
Asim Ali Mar 15, 2017 8:07AM ET
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good
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