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Higher interest rates hurt crude oil

The current trend in monetary policy decision-making hurts commodities denominated in the US Dollar. Crude oil dives under support level.

The fall under support

The crude oil is on the negative wave, together with the rest of the markets. Last week oil paused declining and set up temporary support around the level of $80. But this week the bloodbath continues and the price of black gold falls below the mentioned level into the $70’s territory.

Related article: U.S. fuel exports broke records

The price of crude oil is known for its bigger volatility in comparison with other assets, and the price range from last weeks top ($86.68) to today’s low ($76.50) is -11.76%. And that is an enormous move just in several days.

30 minutes chart of CL (The Futures of Crude Oil), Week performance. Source: tradingview.com

30 minutes chart of CL (The Futures of Crude Oil), Week performance. Source: tradingview.com

Futures volume

The futures volume from the last week confirms that the pause was just a deep breath in the current decline. Commodities are predominantly quoted in the US dollar. It is the most used denomination, and thus the highest liquidity.

The current situation in the US monetary policy, as we know, helps the dollar to get stronger. And with a stronger dollar, commodities decline. The daily market profile shows how volume has been accumulated during the last week. This accumulation creates a strong area of interest (red rectangle). In the case the price goes up, the area could work as resistance.

30 minutes chart of CL. Daily Market Volume Profile. Source: Author’s analysis

30 minutes chart of CL. Daily Market Volume Profile. Source: Author’s analysis

Higher interest rates hurt Crude oil

The global trend in raising interest rates could be seen as a logical step to fight inflation. But some of the central banks have a stronger impact on the markets than others. The Fed is definitely one of them. And the last steps made by the Fed sparks demand for the US dollar. The impact of higher interest rates is the main enemy to crude oil. Commodity erased all gains from this year and touched lows from this January.

Read more: FOMC showed absolute hawkishness – what it means in practise

The pressure is seen among members of OPEC. Despite the negative trend in price development, the official statement is that the Organization will closely watch the current development of crude oil. Speculations about, at least, word intervention from the side of OPEC are rising.

Tomas is a professional trader and money manager on foreign exchange market from 2014. His main domain are commodities. Experiences gained due this period are transformed to consul...

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