A slew of weak economic data last week and a stronger U.S. Dollar helped pressure December crude oil futures the week-ending November 1. Traders read the economic data as a sign that the recovery was sluggish, leading to expectations of lower demand. This was confirmed by the latest government report that showed U.S. oil supplies rose more-than-expected last week.
The latest Federal Reserve monetary policy statement also hurt crude oil prices last week because its ambiguity drove up the U.S. Dollar, making dollar-denominated crude oil more expensive to foreign investors, furthering weakening demand.
Traders were caught off guard by the Fed’s assessment of the economy. Many had priced in the possibility the economy had weakened enough to push the start of tapering its monetary stimulus into March 2014. Instead, the Fed’s statement seemed to imply that the recovery was on track, leaving open the possibility of a December taper.
This created the uncertainty that drove up the U.S. Dollar because tapering, or the reduction of stimulus, tends to drive up interest rates and thus demand for the underlying currency. Until traders can eliminate the fear of an early tapering, the dollar may continue to rally, essentially keeping downside pressure on the crude oil market.
The outside market influence appears to have put crude oil in a no-win situation. On one hand, an improving economy will bring the Fed closer to tapering, driving the dollar higher…