Oil rally fizzles as Fed rate hike comments boost dollar

Latest Update: October 29, 2015 | 1075 Views

Singapore: Oil prices tumbled in Asia Thursday, cutting short a rally the day before after hints of an interest rate hike in December by the US Federal Reserve boosted the dollar.


Prices rose Wednesday after the US Department of Energy said the country´s commercial crude stockpiles had increased less than expected, suggesting stronger demand in the world´s top oil consuming nation.

But the rebound was punctured after the Fed on Wednesday signalled it could raise rates before the end of the year, expressing optimism for the world´s top economy after “solid” consumer spending and business investment.

“With the Federal Reserve holding off on interest rates hikes on Wednesday, the market will keep watch on the December meeting where a rate hike is likely in play,” said Sanjeev Gupta, head of the Asia Pacific oil and gas practice at professional services firm EY.

At around 0330 GMT, US benchmark West Texas Intermediate for delivery in December was trading 16 cents lower at $45.78 and Brent crude for December was down 21 cents at $48.84.

US oil prices jumped more than six percent in Wednesday´s session after news domestic crude supplies rose less than expected in the week ending October 23.

The news helped ease some fears over a glut of world supplies that experts warn could last well into next year, which has seen oil prices more than halve from last year´s highs.

But the rally was cut short when the US central bank explicitly pointed to the possibility of a rate hike in its next meeting in December, dampening market predictions it could be held off until March.

The news pushed the dollar higher — an interest rate hike is bullish for the dollar as it attracts investors to the currency in the quest for higher returns.

But because oil is traded in dollars, a strong US currency will make the commodity more expensive for holders of weaker units, hurting demand and prices.

“We are still expecting the Fed rate normalisation to be an eventuality and the latest Federal Open Market Committee decision further reaffirms our expectation for the first hike (since 2006) to take place in the 15-16 December 2015 FOMC (meeting),” United Overseas Bank said.