US Dollar Index hits 4-week high, putting pressure on commodities
Oil prices fell 2% on Monday as investors turned risk averse and oil became more expensive for holders of other currencies as the US dollar rose.
Investors are watching the Fed policy meeting to avoid risk amid diminishing clues, which is hurting stock markets.
After hitting the session low of $73.52, Brent fell $1.42, or 1.9%, to settle at $73.92 a barrel. West Texas Intermediate (WTI) fell $1.68, or 2.3% close at $70.29 a barrel, after hitting lowest to $69.86.
The dollar rallied as concerns over the solvency of Chinese real estate firm Evergrande raised concerns in equity markets and investors expected the Federal Reserve to take another step toward contraction this week.
Since the US dollar is generally a safe haven, the exchange rate against other currencies is strengthening. This development affects commodity prices, especially oil. Oil is becoming more expensive for non-dollar markets, and as a result, prices are trending downwards supported by the stock market in a risk aversion environment.
Brent has gained 43% this year, supported by supply disruptions from the Organization of the Petroleum Exporting Countries and its allies, and some recovery in demand after last year's pandemic-induced crash.
Monday's losses were limited by supply disruptions in the US Gulf of Mexico from the last two hurricanes. As of Friday, producing companies had only 23% of crude oil production, or 422,078 bpd.
Oil has received some support from signs that some output in the US Gulf will be out for months due to storm damage.
Crude oil slid lower on Monday after Royal Dutch Shell said it expects a facility in the Gulf of Mexico to be out of service for repairs till the end of 2021 due to damage caused by Hurricane Ida.
The facility serves as a transfer station for all output from company assets in the Mars corridor of the Mississippi Canyon region to onshore crude oil terminals.
The loss of production is estimated to reduce Gulf of Mexico oil supply by 200,000 to 250,000 barrels per day (bpd) for several months. The Gulf contributes about 16% of US oil production, or 1.8 million barrels per day.
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