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Futures Movers: Oil prices pull back as Fed’s shift in tone lifts U.S. dollar

Oil futures edged lower Thursday, with the U.S. benchmark pulling back from its highest close in more than 2 1/2 years as the dollar strengthened in the wake of a hawkish shift in tone by the Federal Reserve.

West Texas Intermediate crude for July delivery
CL00,
-0.33%

CLN21,
-0.33%

was down 14 cents, or 0.2%, at $72.01 a barrel on the New York Mercantile Exchange. August Brent crude
BRN00,
-0.54%

BRNQ21,
-0.54%
,
the global benchmark, fell 20 cents, or 0.3%, to $74.19 a barrel on ICE Futures Europe. WTI on Wednesday saw its highest close since October 2018, while Brent logged its highest settlement since April 2019.

The dollar strengthened after Fed policy makers penciled in two rate hikes by the end of 2023 and discussed the eventual tapering of the central bank’s asset buying program. The ICE U.S. Dollar Index
DXY,
+0.72%
,
a measure of the currency against a basket of six major rivals, was up 0.7% at 91.80.

A stronger dollar can weigh on commodities priced in the currency, making them more expensive to users of other currencies, though pressure on crude was offset by strong demand expectations, analysts said.

“The Fed’s surprise move accelerating the path towards policy normalization caught the oil market off guard,” said Sophie Griffiths, market analyst at Oanda, in a note.

Oil had rallied ahead of the Fed statement Wednesday as government data showed a large drop in U.S. crude inventories, due in part to a rise in exports, which signaled that demand was picking up around the world, she said, noting that optimism over demand fed a rise of around 11% for crude over the past four weeks.

Thursday’s pullback has “barely touched the strong rally that oil has witnessed over the past month,” Griffiths wrote. “U.S. dollar strength has not been able to derail oil’s incredible recent rally. The uptrend is firmly intact.”

Direction in the near term may also be dictated by U.S. output, analysts said. Data shows U.S. oil production, at 11.2 million barrels a day, is at its highest level since last May, noted Eugen Weinberg, commodity analyst at Commerzbank, in a note.

“The speed at which production is being ramped up in the U.S. will dictate the direction of oil prices in the medium term: if U.S. oil production recovers more quickly than expected, this would undermine the pricing power of OPEC+ and allow the U.S., as a marginal producer, to become a price-determining factor again,” he wrote.

But that’s not what looks likely to happen, Weinberg said, noting that energy agencies “envisage a slow rise in U.S. production, which is more likely to support oil prices.”

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