Oil prices surge on weaker U.S. dollar

Price action

• West Texas Intermediate crude for January (CL00, +2.39% CL.1, +2.39%) experienced a gain of $1.43, or 2%, reaching $70.90 per barrel on the New York Mercantile Exchange.
• February Brent crude (BRN00, +2.34% BRNG24, +2.34%), the global benchmark, increased by $1.53, or 2.1%, reaching $75.92 per barrel on ICE Futures Europe.
• January gasoline (RBF24, +2.28%) saw a rise of 2.2% to $2.070 per gallon, while January heating oil (HOF24, +1.12%) rose by 1.6% to $2.588 per gallon on Nymex.
• Natural gas for January delivery (NGF24, +2.27%) increased by 1.5% to $2.37 per million British thermal units.

Market drivers

Oil prices continue to rally following the Federal Reserve’s decision on Wednesday to cut interest rates three times next year.

Market analysts note that the Fed’s policy statement and projections had a clearly dovish tone, leading to a decline in the U.S. dollar and Treasury yields. As a result, commodity prices are surging, benefiting from the weaker U.S. dollar. It’s worth noting that commodities sold globally are typically priced in dollars.

Wednesday’s Fed Decision and its Impact on Markets

Wednesday’s decision by the Federal Reserve (Fed) carries significant implications for the financial markets. However, there seems to be a general disregard among traders for a report recently released by the International Energy Agency (IEA). This report raises concerns over the continuation of weak demand and the escalating supply levels from non-OPEC+ countries. Remarkably, the IEA has reduced its demand forecast by 400,000 barrels per day compared to its previous estimate, issued only a month ago.

Following a prolonged period of declining oil prices, there has been an uptick in prices due to traders covering their short positions. Ole Hansen, the head of commodity strategy at Saxo Bank, attributes this price increase to a combination of factors such as a weakening dollar, significantly lower yields, and the potential for lower interest rates in the coming year. Hansen believes that recent market positioning has increasingly favored lower oil prices. However, given the Federal Open Market Committee’s (FOMC) recent indication towards rate cuts, it is plausible that we have reached a temporary low point for oil prices.

Furthermore, on Thursday, the US dollar continued to weaken, with the ICE US Dollar Index (DXY), a widely followed indicator of the dollar’s strength against major currencies, falling by 0.5% to 102.38.