Crude oil (CL) futures
Fundamental Analysis

Oil Prices Struggling Despite Weak Dollar & Improved Risk Appetite

  • A weaker dollar revived interest in risky investments.
  • The Fed increased its target interest rate by 25bps.
  • OPEC+ maintained the production cuts agreed upon last year.

Oil continued its bearish momentum despite positive market sentiment on Thursday. However, the OPEC+ decision to extend an output cut allayed concerns about oversupply.

Oil prices dropped more than 3% overnight due to significant increases in crude and oil product inventories revealed by US government data.

Fed funds target rate, US PCE inflation (Source: Refinitiv Datastream)
Fed funds target rate, US PCE inflation (Source: Refinitiv Datastream)

The Federal Reserve lifted its target interest rate by 25 basis points after Wednesday’s meeting. Still, it kept its vow of “continuous rises” in borrowing rates as part of its continuing fight against inflation.

The US central bank explicitly acknowledged the progress in slowing the rate of price increases from the 40-year highs hit last year when it noted, “Inflation has moderated considerably but remains elevated.”

Investors took a dovish lead from comments made by Fed Chair Jerome Powell, who frequently mentioned the “disinflationary” process now in motion.

The epidemic and other factors that the Fed has said over the last year were raising prices were either completely left out of the speech or, in the case of the war in Ukraine, were merely mentioned as a source of “global uncertainty” rather than inflation.

As a result of lower rate hike expectations, the US dollar index plunged to a new nine-month low on Thursday, making oil cheaper. 

At a meeting on Wednesday, an OPEC+ panel approved the oil producer group’s current output strategy, maintaining the production cuts agreed upon last year amid expectations of increased Chinese demand and hazy prospects for Russian supply.

To boost the market, OPEC+ decided to reduce its production goal by 2 million barrels per day (bpd), or around 2% of global demand, from November 2022 until the end of 2023.

Prices are also going up in the backdrop of the European Union’s impending ban on refined Russian goods on February 5.

After delaying a decision on Wednesday due to disagreements among member states, diplomats said the EU countries would try to reach an agreement on Friday.

Last week, the European Commission suggested that the EU implement a price restriction of $100 per barrel on premium Russian oil products, like diesel, and a cap of $45 per barrel for discounted items like fuel oil, effective as of February 5. This would likely tighten supply and push oil prices higher.