Oil Falls as U.S. Dollar Strengthens

02/02/18 07:16 PM EST
By Stephanie Yang 

Oil prices are no longer trading in their own world.

After months of taking direction from information on global supply and demand, crude markets are falling back into step with broader markets, taking cues over the past two weeks from fluctuations in the U.S. dollar.

Earlier this past week, oil hovered near a three-year high, as the dollar fell to the lowest level in more than three years. But on Friday, a rebound in the dollar dragged down crude prices.

The reversal occurred as stocks, bonds and other commodities also retreated. The Dow Jones Industrial Average fell 665.75 points Friday, closing out its biggest one-week percentage decline since January 2016 with a 4.1% drop. The U.S. 10-year Treasury yield rose to the highest level in more than four years.

"The stock market and interest rates can really affect oil a lot," said Mark Waggoner, president of Excel Futures. "It's spilling over into the energy markets and causing these ripple effects."

Volatility picked up across markets Friday after the Labor Department said the U.S. economy added 200,000 jobs in January, beating economists' expectations. Meanwhile, the unemployment rate stayed at a 17-year low and wage growth accelerated, stoking concerns about higher interest rates.

That sent the WSJ Dollar Index higher. The gauge, which tracks the dollar against a basket of 16 currencies, rose 0.7% to 83.58.

Light, sweet crude for April delivery settled down 35 cents, or 0.5%, to $65.45 a barrel on the New York Mercantile Exchange, and traded as low as $64.47 during the session. Brent, the global benchmark, declined $1.07, or 1.5%, to $68.58 a barrel.

Other commodities such as gold and copper settled lower Friday as well.

Commodities such as oil, which are priced in dollars, become more expensive to buyers using other currencies when the U.S. unit strengthens. Analysts at Capital Economics attribute half of the surge in oil prices since the beginning of December to a weaker U.S. dollar, the research firm said in a Friday report.

"The dollar is the talk today," said Ric Navy, vice president for energy futures at R.J. O'Brien & Associates LLC. "You've had more attachment to it recently."

Energy companies led stocks lower Friday, as the S&P 500 energy sector fell more than 4%, wiping out nearly all of its year-to-date gains that had resulted from a rebound in crude prices.

Chevron Corp. and Exxon Mobil Corp. shares both fell more than 5% after reporting quarterly profits that missed analysts' expectations, the biggest one-day loss for both companies since 2011.

"Some of the selloff in energy is being compounded by the broader market weakness," said Chris Kettenmann, chief energy strategist at New York-based Macro Risk Advisors. "What's really coming to the surface is how much stocks are down."

The correlation between oil and the stock market has become more pronounced in recent days.

"The potential is present for a big move lower should fear return to the stock market and spark liquidations across the board," analysts at TAC Energy said Friday. "The cross-asset class correlations have returned over the past several weeks."

But supply could rear its head again, meaning oil prices would revert back to trading based on dynamics that are more closely tied to the energy market.

Ed Morse, global head of commodities research at Citigroup, said investors have been ignoring the risk that U.S. shale producers will flood the market with oil once again.

Shale companies spent the past three years becoming leaner and wringing costs out of their operations and can now comfortably make money at these prices, so investors banking on companies to show greater discipline could be in for a disappointment.

"The animal spirits that drive these companies overshadow any commitment to having discipline," Mr. Morse said. "Only the most naive of analysts or investors actually believe that's going to happen."

According to the U.S. Energy Information Administration, U.S. oil production exceeded 10 million barrels a day in November for the first time in nearly 50 years. On a weekly basis, domestic production rose to a fresh record for the week ended Jan. 26 of more than 9.9 million barrels a day, government data show.

"2018 could turn out to look a lot like 2014 -- a year that started with very high prices and ended at very low prices," Mr. Morse said.

Write to Stephanie Yang at stephanie.yang@wsj.com

 

(END) Dow Jones Newswires

February 02, 2018 19:16 ET (00:16 GMT)

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