Crude Oil Rebounds From Early Slide

West Texas crude ends the session up 36 cents at $136.74 a barrel on the New York Mercantile Exchange.
Author:
Publish date:

Crude oil futures rallied in the afternoon Thursday following a weak morning that saw energy come under pressure from an advance in the dollar.

West Texas crude overcame its early sluggishness and ended the session up 36 cents at $136.74 a barrel on the New York Mercantile Exchange. Brent crude gained $1.07 to $136.09.

Reformulated gasoline added 6 cents to $3.53 a gallon.

A surprisingly strong retail sales report released by the Commerce Department sent the greenback into overdrive. The euro was recently down against the dollar by nearly a cent and a half at $1.5432. The dollar was also gaining more than 1% against the Japanese yen and the British pound.

Oil tends to weaken when the value of the U.S. dollar appreciates for a couple of reasons. First, oil is traded in U.S. dollars in international markets. That means that when China buys oil from Saudi Arabia, it pays for it in U.S. dollars, not Chinese yuan. Thus, when the dollar's value escalates, China can give fewer dollars to Saudi Arabia for the same amount of oil than it did previously.

Second, because the inverse price relationship between oil and the dollar has been proven fundamentally reliable, traders and investors with negative exposure to the steep fall in the dollar over the past three years have been increasingly using oil futures contracts as their hedge instrument of choice.

When this new group of buyers entered oil futures markets at roughly the same time to essentially trade in tandem, it effectively added a whole new level of bullish purchasing power behind crude oil.

Investors holding net-long positions in oil futures for the purpose of dollar-hedging are spurred to sell their oil positions when the U.S. currency moves back to the upside. To begin, their oil investments start to lose value because of the fundamental relationship between the dollar and oil. Plus, the capital they have tied up in dollar hedge-positions suddenly becomes unproductive, leading them to eliminate those positions and invest their money elsewhere.

Meanwhile, energy stocks were for the most part lower.

BP

(BP) - Get Report

was down 0.7% at $69.38, and

ConocoPhillips

(COP) - Get Report

lost 1.3% at $92.84.

Chevron

(CVX) - Get Report

declined 1% to $98.39, and

Exxon Mobil

(XOM) - Get Report

fell 1.1% at $87.63.

The

United States Oil

(USO) - Get Report

exchange-traded fund was up 16 cents at $111.15.