Oil Ends Down 6% as Dollar Soars on Rate Hike Fears

By Barani Krishnan

Crude oil prices experienced a significant decline of 6% on Monday as the dollar reached its highest level in 20 years, driven by concerns over potential U.S. rate hikes. This surge in dollar value negatively impacted commodities priced in the currency, as well as other risk assets, including stocks and cryptocurrencies.

Brent crude, the global oil benchmark traded in London, settled down by $6.45, or 5.7%, at $105.94 per barrel. Meanwhile, West Texas Intermediate (WTI), the U.S. crude benchmark, fell by $6.68, or 6.1%, ending the day at $103.09.

This decrease reversed the nearly 6% gain seen in both Brent and WTI the previous week, following the OPEC+ oil exporters alliance’s agreement to an output increase of 432,000 barrels per day, which was insufficient to meet anticipated summer oil demand.

The decline in crude prices coincided with discussions among Federal Reserve officials regarding a potential 75 basis point rate hike in the U.S. Some officials felt such a move might be excessive, while others believed it was necessary to combat soaring inflation. This would be the Fed’s first 75-basis point hike since 1994.

Market traders have already priced in a 79% chance of this hike during the Fed’s upcoming June 14-15 meeting, following a 50-basis point increase last week—the largest hike in two decades.

Although the Fed maintains that its aggressive rate hikes will not push the U.S. economy into recession, market sentiment reflects skepticism about this assurance.

John Kilduff, a founding partner at an energy hedge fund, noted that the Fed’s assertive stance on rates could negatively impact market sentiment across various sectors, including stocks and oil. Analyst Ed Moya echoed this sentiment, stating that Wall Street remains hesitant to "buy the dip," as inflation looks set to remain high, prompting tighter policies that could jeopardize economic stability.

In conjunction with falling oil prices, major stock indices also plunged, with the Nasdaq Composite, which includes leading tech companies, hitting a session low of 11,646—matching a low from November 2020. The index has already decreased 5% in May, adding to a 13% decline in April, resulting in a year-to-date loss of 25%.

Bitcoin also suffered, dropping nearly 50% from its record high, trading around $32,360, down from its November peak of $68,991.

The dollar, benefiting from the prospect of U.S. rate hikes, reached its highest level in two decades, with the dollar index climbing to 104.12, the highest since 2002.

The U.S. economy contracted by 3.5% in 2020 due to pandemic-related disruptions but rebounded with a 5.7% growth in 2021—the fastest pace since 1982. However, inflation has surged even more rapidly, with the Personal Consumption Expenditure Index rising by 5.8% for the year ending in December and 6.6% in the 12 months to March, marking the fastest growth since the 1980s.

The U.S. Consumer Price Index (CPI), another critical inflation metric, increased by 8.5% for the year ending in March. The upcoming April CPI report is set to be released soon, with analysts expecting an 8.1% year-on-year growth, although actual results could differ. The Fed’s target inflation rate remains at a modest 2% per year.