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Oil Ends Down 6% as Dollar Flies on Rate Hike Fears

Published 05/09/2022, 01:17 PM
Updated 05/09/2022, 01:21 PM
© Reuters.

By Barani Krishnan -- Crude prices fell 6% on Monday as the dollar hit 20-year highs on U.S. rate hike fears that hammered the value of not just commodities priced in the currency but also other risk assets such as equities and cryptocurrencies.

Brent crude, the London-traded global benchmark for oil, settled down $6.45, or 5.7%, at $105.94 a barrel.

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, settled down $6.68, or 6.1%, at $103.09.

The drop wiped out last week’s near 6% gain in both the Brent and WTI after the OPEC+ oil exporters alliance agreed at its monthly meeting to a nominal output hike of 432,000 barrels per day that fell well short of the projected summer demand for oil.

The slump in crude prices came as central bank officials at the Federal Reserve debated on whether the next US rate hike should be 75 basis points, with some saying that would be excessive while others argued it might be necessary to stop runaway inflation. The last time the Fed raised rates by 75 basis points was in 1994.

Money markets traders have already priced in a 79% probability of a 75-bps hike at the Fed’s upcoming June 14-15 meeting — after last week’s 50-bps increase at its May meeting, which in itself was the largest increase in 20 years.

The Fed insists that its regime of high rate hikes will not tip the US economy into recession, but the markets aren’t buying that argument for now.

“The Fed looks increasingly belligerent where rates are concerned and this could spook sentiment across, beginning with stocks right through to oil,” said John Kilduff, founding partner at New York energy hedge fund Again Capital.

Ed Moya, an analyst at online trading platform OANDA, concurred with that view.

“Wall Street remains uninspired to ‘buy the dip’ as inflation seems poised to remain stubbornly high, which will force the Fed to tighten policy to levels that will jeopardize the soft landing most traders were expecting,” Moya said. “Oil prices are dropping fast as crude demand destruction fears grow given China’s COVID situation and the de-risking event happening with U.S. stocks.”

Commodities aside, stocks on Wall Street also plunged, with the Nasdaq Composite index — which groups top technology names such as Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google (NASDAQ:GOOGL) — hitting a session low of 11,646 on Monday that matched a bottom from November 2020. The Nasdaq is already down 5% for May, extending April’s 13% selloff. Year-to-date, the tech barometer has lost 25%.

The price of Bitcoin, meanwhile, plunged by almost 50% from its record high, hovered at $32,360 in New York’s noon trading versus its November record high of $68,991.

The dollar — the chief beneficiary in any U.S. rate hike — soared to 20-year highs, with the Dollar Index, which pits the greenback against six other major currencies, scaling 104.12, a peak since 2002.

After contracting 3.5% in 2020 from disruptions forced by the coronavirus pandemic, the US economy expanded by 5.7% in 2021, growing at its quickest pace since 1982.
But inflation grew even faster. The Personal Consumption Expenditure Index, a US inflation indicator closely followed by the Fed, rose by 5.8% in the year to December and 6.6% in the 12 months to March. Both readings indicated the fastest growth, also since the 1980s.

The U.S. Consumer Price Index, or CPI, another key measure for inflation, rose 8.5% in the year to March. The  April reading for the CPI is on Wednesday, with analysts betting on an 8.1% growth year-on-year, though the actual number could surprise.

The Fed’s own tolerance for inflation is a mere 2% per year.

Latest comments

Given the FACT that the stock market is in sell-off mode, and everyone is thinking recession or worse due to interest rates. And everyone seems to be TALKING  about oil falling hard. My question when something DOESNT seem to be doing what everyone SAYS its doing, is WHY isn't it doing what they all say its doing? oil may have fallen today, BUT it ran way up last week BEFORE falling and IMHO any fall in oil in a crashing stock market. loaded with talk of RECESSION, that DOESNT EVEN take it below $100 a barrel.... makes me VERY suspicious. are they just trapping shorts, yet again? at any rate we can talk about oil CRASHING when it does the FIRST thing to indicate it. and SO FAR with oil  holding $102 with the market CRASHING and interest rates flying higher sure DOESN'T look like a call to short oil if anything its showing incredible strength. Just a thought before we race to short oil stocks paying 4% div and showing sky high profits at $90 plus oil. Ill believe when I see sub $90 oil.
fuk this news, look yield min 3% today, fuk fear rise rates, this want biden oil drop, he fear rise rates but reality not up. fuk usa
Want a sure bet with interest rates rising and market falling? Short LUMBER and its suppliers. The housing market is about to make what's happening to the Nasdaq look like a celebration.
There is no way in the universe that fed can raise rates without ultimately crashing the bubble economy based on cheap money.
 i've watched market run-ups and crashes since the 1974 recession, and the bottomline has always been that the market will run-up until all the bears are out and the bulls believe it can go on forever, then it will ALWAYS find a reason (usually involving oil price hikes and interest rates) and it will FALL until all the bulls QUIT trying to buy the pullback and become SHORTS themselves. We are STILL in the "buy stocks they're CHEAP" mindset which means FAR from bottom.  Don't believe? take a HARD look at FANG. also I studied morgage rates clear back to 1930. want to know the AVERAGE mortgage rate? 8.6% any idea where that puts a $300k payment? $2100 a math on JUST the interest.... HD and builders BYE BYE. Also in the late 1970 they tried to stop inflation by increasing interest rates from 8% to 20% it only INCREASED INFLATION and gold ran wild. of course at 20%  in 1980 the whole world came to a stop and Inflation with it. I wouldn't be on oil crashing, but HOUSINg? 100% guaranteed.
Im not at all sure that THIS time the market will one day go higher, because im doubtful that money Will EVER be free again for all these companies. and THATs what got us to TOP. Free money. but the ONE thing im sure of is oil running up, along with Europe trying to END dependence on will only HASTEN the move to EV's worldwide and that a healthy CHINA will provide most of them. Xpev is my pick. Great car and much cheap than Tesla. worth a look guys. I hope it falls to $15 its one stock that I would buy and hold even if the nasdaq falls to 8000 again.. if they all have to start PAYING for money, it easily could. especially if crashing market AND crashing housing market, start another bout of everyone walking away from their mortgages because their house is world HALF what they paid.
 Thanks much for this wonderful perspective, which neatly fits into my theory that the Fed will have no choice but to tear down the housing market, which probably carries about half of the inflationary pressure now.
Looks like OPEC+ knows the game here
The Saudis dropped their Asian selling price last week. It was an item that went below the radar but has deep repercussions for crude. The Russians are selling crude at discounts similar to a barnyard sale. So far, India has been brazen in buying from Russia but other Asian nations could follow suit. That could eventually hit Saudi demand for crude in Asia. So, when Saudi OSPs go down and Russia sells at discount, what does tell you about the flat price of crude?
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