How The Federal Reserve Has Pushed The Price Of Oil Higher

The price of oil has recovered steadily since hitting a low of less than US$30 per barrel in January this year. At the moment, oil is sitting comfortably above US$45, after receiving a timely push from the Federal Reserve, the US’s central bank.

The Fed’s statement and oil

On Wednesday night, the Fed announced its latest decision not to hike interest rates in the US.

The Fed’s decision to hold rates steady had the immediate impact of weakening the US dollar. The US dollar index, which measures the dollar’s strength against six other major currencies, dropped 0.66% following the Fed’s announcement.

As oil is priced in the US dollar, a fall in the currency would mean a rise in oil prices, all other things held equal.

Meanwhile, the Fed had highlighted pockets of strength in the US economy in its announcement. The Fed acknowledged that US households’ real income had grown, the labour market had strengthened, and the housing sector had improved.

So why did the Fed not raise interest rates this time round? Despite the higher household income, growth in US household spending had moderated. Meanwhile, exports and business fixed investments had been weak too. These also had an influence on the Fed’s decision making with interest rates.

But, it’s worth noting that household spending is likely to improve with time alongside a growing housing market and income. Higher demand from US consumers can be a boon for oil prices in time to come.

A Foolish conclusion

After the Fed’s statement was released, the price of oil actually rallied by 3%.

Given current developments, there’s a possibility that oil prices will climb materially higher over the long-term. There are many companies in Singapore’s stock market that have heavy exposure to the price of the commodity and this includes Keppel Corporation Limited (SGX: BN4) and Ezion (SGX: 5ME), just to name two.

Investors in oil & gas companies may want to feel the pulse of the industry every now and then.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Ong Kai Kiat does not own shares in any companies mentioned.