Oil Down 6% as Dollar Flies on Rate Hike Fears

© Reuters.

By Barani Krishnan

AiVIF.com -- 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, was down $6.10, or 5.4%, to $106.29 a barrel by 1:08 PM ET (17:08 GMT).

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, was down $6.30, or 5.7%, to $103.47.

The drop wiped out last week’s near 6% gain in both 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 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 on rate hike fears on Monday, 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 11,714 on Monday that matched a two-and-a-half-year bottom. 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.