Rising US dollar pushes oil prices down

World oil prices

At the end of the trading session on May 18, oil prices fell about 1% after solid US economic data pushed the USD to a two-month high due to expectations that the US Federal Reserve (Fed) could raise interest rates in mid-June.

According to Reuters , Brent crude for July delivery fell $1.10, or 1.4%, to $75.86 a barrel. US West Texas Intermediate (WTI) crude fell 97 cents, or 1.3%, to $71.86 a barrel.

A strong US dollar affects demand for oil by making the fuel more expensive for holders of other currencies.

U.S. inflation doesn't appear to be cooling fast enough to allow the Fed to pause its rate-hike campaign that began more than a year ago, according to Dallas Fed President Lorie Logan and St. Louis Fed President James Bullard.

Fed Governor and vice chairman nominee Philip Jefferson also said on May 18 that while inflation is slowing, it is still too early to fully feel the impact of those rapid rate hikes.

Fed Chairman Jerome Powell is scheduled to speak today (May 19). Investors expect that Mr. Powell will update his views on the possibility of pausing or continuing to raise interest rates based on aggregate economic data from the Fed's last meeting in early May.

Higher interest rates increase borrowing costs and could slow the economy and reduce oil demand. What is good news for the economy is now bad news for the outlook for crude demand as the economic recovery will force the Fed to “kill” the economy, said Edward Moya, senior market analyst at data and analytics firm OANDA.

In a report released on May 18, ANZ Research emphasized that US economic data in April along with optimism about debt ceiling negotiations have reinforced market expectations for another interest rate hike.

Previously, on May 17, US President Joe Biden and Republican Congressman Kevin McCarthy emphasized their determination to reach an agreement to raise the $31.4 trillion debt ceiling because, according to US Vice President Kamala Harris and Biden's top economic advisor, Lael Brainard, default would push the economy into recession.

Meanwhile, European Central Bank (ECB) Vice President Luis de Guindos said the ECB will have to continue raising interest rates further to bring inflation back to its medium-term target of 2% even though most of the tightening measures have been implemented.

Also weighing on oil prices was a slide in blue-chip stocks in China, the world's biggest oil importer, after industrial output and retail sales growth in the country came in below forecasts, suggesting the economic recovery is losing momentum.

Another factor that could dampen oil demand is a fire at the Salina Cruz refinery owned by Mexico’s state oil company Pemex. Workers were evacuated, no one was injured and the fire is under control.

On the supply side, Saudi Arabia’s crude oil exports rose about 1% to 7.52 million barrels per day in March from the previous month, according to JODI data. However, Kpler and Petro Logistics said Saudi Arabia’s exports may have fallen in May due to the kingdom’s and other OPEC+ members’ voluntary production cuts.