Oil prices declined on Friday as traders took profits following substantial gains this week, while a rebound in the dollar, supported by robust U.S. economic data, also exerted pressure on the crude markets.
Crude prices had surged to April highs on Thursday after reports revealed better-than-expected growth in the U.S. economy during the second quarter, allaying concerns about a potential recession that could dampen oil demand this year.
The positive economic data, coupled with indications of tightening supply due to production cuts by Saudi Arabia and Russia, contributed to the strengthening of the U.S. dollar. This led some investors to secure profits in oil prices, despite still heading for significant weekly gains.
At 21:00 (01:00 GMT), Brent oil futures dropped 0.5% to $83.30 per barrel, while West Texas Intermediate crude futures also fell 0.5% to $79.66 per barrel. Nonetheless, both contracts were poised to add between 2.5% and 3.5% over the week, marking their fifth consecutive week of gains.
Stronger Dollar Exerts Pressure on Oil Prices
On Thursday, the U.S. dollar rose 0.6% against a basket of currencies, recovering significantly from recent losses due to signs of resilience in the U.S. economy. The dollar’s strength typically affects commodities priced in the greenback, leading to downward pressure on oil prices.
The dollar’s rally was further supported by increased buying activity following indications from the European Central Bank of a potential end to its rate hike cycle, which diminished the attractiveness of the euro.
Strong U.S. Economic Data Fuels Rate Hike Speculation
The robust U.S. economic data led investors to factor in the possibility of at least one more interest rate hike by the Federal Reserve. The central bank had already raised interest rates by 25 basis points earlier in the week, while also keeping the door open for additional hikes in the future.
Higher oil prices can contribute to persistent inflation, potentially encouraging the Fed to maintain a hawkish stance in the months ahead.
Supply Constraints and Robust Demand Support Oil Prices
Despite concerns about tighter U.S. monetary policy, the outlook for oil prices remained positive due to signs of tightening supplies, influenced by recent production cuts initiated by Russia and Saudi Arabia.
Reports on Friday suggested that Saudi Arabia’s 1 million barrels per day cut could extend until the end of September, further bolstering market sentiment. This positive outlook overshadowed data indicating a smaller-than-expected draw in U.S. inventories, despite the ongoing demand surge during the summer season.
Additionally, markets were optimistic about the potential for more stimulus measures in China, the world’s largest crude oil importer, which could boost demand further throughout the year.
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