Crude oil prices fell nearly $1 a barrel on Tuesday as the dollar strengthened to a two-year high, even as supply concerns remain after Libya shut down its oil fields amid political protests.
The international benchmark for Brent crude futures fell 0.98 percent to $112.06 a barrel, and US crude oil futures fell more than 1 percent to $107.11 a barrel.
Both contracts rose 1 percent in the previous session, following the loss of supply from Libya and expectations for oil demand from China, which has reopened its factories after being closed for nearly three weeks in Shanghai.
But crude oil gains were limited by the dollar’s new rise to its two-year high. A stronger dollar hurts oil buyers holding other currencies.
On Tuesday, the dollar rose to a new two-year high, followed by higher yields on US Treasuries, highlighting inflation risks. Investors are bracing for multiple half-percentage-point rate hikes by the Federal Reserve.
The US interest rate futures market has estimated a 96 percent chance of a 50 basis point tightening at the Fed’s May policy meeting and about 215 basis points of cumulative rate hikes this year, providing ample support for the dollar.
“The dollar index has moved slightly higher over the past few sessions amid prospects that the Federal Reserve may adopt a more aggressive rate-raising process than previously estimated. The Fed has already started raising rates this year, and rising inflation is one factor support the view for more rate hikes,” said Gaurang Somaiya, Forex & Bullion Analyst at Motilal Oswal Financial Services.
“The Fed minutes released earlier suggest that central bank officials have also begun discussing deleveraging, another tool to manage its fight against inflation. If we continue, the aggressive stance of the Federal Reserve is likely to extend earnings for the dollar,” he added.
But supply concerns remain, and oil prices have largely kept the price above $100 since Russia invaded Ukraine in late February.
That even as China continues to impose strict restrictions to contain COVID outbreaks.
“We are still in a drag at the end of the day between global supply shortages and China’s COVID demand crisis,” SPI Asset Management CEO Stephen Innes said in a note.
The prospects of an EU ban on Russian oil before the invasion of Ukraine have weighed on investors too.
“Market sentiment was bolstered by the Russian minister who said more countries banning Russian oil imports would mean oil prices would exceed historic highs,” ANZ Research analysts said in a note, Reuters reported.