Crude Oil Futures
Fundamental Analysis

Oil Prices Slip 1% to Three-Week Low Amid Stronger US Dollar

  • The US Federal Reserve left the door open for potential rate hikes.
  • There was an uptick in US crude and gasoline inventories last week.
  • China reported an unexpected contraction in factory activity in October.

Oil prices dropped by approximately 1% to reach a three-week low. This decrease came from a stronger US dollar and the US Federal Reserve maintaining interest rates while leaving the door open for potential rate hikes due to the robust US economy. Interest rate increases can hinder economic growth and reduce oil demand. 

Meanwhile, a strong dollar raises the cost of purchasing fuel in other currencies, which puts pressure on oil prices. The Federal Reserve, which began raising interest rates in March 2022, kept rates unchanged but indicated a possible future increase due to the strong US economy.

Crude futures faced additional pressure from an uptick in US crude and gasoline inventories during the past week. Refineries engaged in seasonal maintenance resumed operations more slowly than anticipated to avoid significant increases in gasoline stocks.

In Europe, a flash reading by Eurostat revealed that October inflation in the Eurozone was at its lowest point in two years, suggesting that the ECB is unlikely to lift interest rates in the near future. Meanwhile, the Bank of England will convene on Thursday.

China economic activity (Source: National Bureau of Statistics)

China economic activity (Source: National Bureau of Statistics)

In China, the world’s largest oil importer, there was an unexpected contraction in factory activity in October, as reported by a private survey. Despite better-than-expected third-quarter gross domestic product growth in China, both the official manufacturing purchasing managers’ index (PMI) on Tuesday and the private survey on Wednesday indicated that the manufacturing sector is not as stable as previously thought. 

According to Moya at OANDA, “The oil market will remain fixated on the deteriorating demand outlook and the potential for supply disruptions resulting from the latest developments in the Israel-Hamas conflict.”

Iran’s Supreme Leader Ayatollah Ali Khamenei urged Muslim states to halt their oil and food exports to Israel, demanding an end to the Gaza Strip conflict.

Iran is a member of the OPEC. It produced around 2.5 million barrels of crude per day in 2022, according to US energy data. Callum Macpherson, the head of commodities at Investec, emphasized that if there is no threat to oil output from the ongoing conflict, oil prices may struggle to remain at recent highs without support from OPEC+ into 2024.