LONDON—Crude futures were down after a surprise decision by the U.S. Federal Reserve to raise its discount rate spooked the commodity markets and supported the dollar.
"The move has pushed [dollar] higher and hurt riskier assets like commodities and stocks. [It] will be interesting to see if bulls stay in control," particularly because U.S. oil inventory data Thursday weren't supportive of further gains, says James Rilett, senior trader at JDR Commodities, a hedge fund in London.
The front-month April Brent contract on London's ICE futures exchange recently was 93 cents lower at $76.85 a barrel. The front-month March contract on the New York Mercantile Exchange was down 83 cents at $78.23 a barrel.
The ICE's gasoil contract for March delivery was $2.75 lower at $621.75 a metric ton, while Nymex gasoline for March delivery was down 2.31 cents at $2.0461 a gallon.
The decision by the Fed to raise its discount rates by 0.25 percentage point late Thursday has weighed on sentiment in the crude and currency markets Friday. Oil prices have given up half of the gains notched Thursday, while the dollar has strengthened against the euro.
Oil prices typically fall when the dollar strengthens as commodities denominated in the greenback become more expensive for holders of other currencies.
Investors reacted to the Fed's decision by turning away from commodity markets, calculating that Thursday's hike is a prelude to an interest-rate rise after a prolonged period of loose monetary policy in the U.S.
"The Fed's move was clearly a shot across the bow, and will likely be followed by further steps to sop up the excess liquidity now permeating through the system," said Edward Meir, senior commodity analyst at MF Global in New York.
"More significantly, because a number of central banks are moving in the same direction, their collective actions could generate significant headwinds for commodities going into 2010."
Separately, traders are continuing to chew over U.S. Department of Energy inventory data released Thursday, after initially gleaning support from a 2.9 million-barrel draw in middle-distillate stocks. However, Andrey Kryuchenkov, vice president of commodities research of VTB Capital, warned against interpreting the distillate draws as a sign of demand and economic recovery.
"We would not get too excited as overall demand is far from ideal, while the recent improvements in demand for distillates can mostly be attributed to the colder weather rather than a strong economic recovery," he added.
The U.S. Department of Energy reported a 3.1 million-barrel increase in crude stocks, above the 1.8 million barrels that analysts projected, while a gasoline-stock build of 1.5 million barrels was in line with expectations. Refiners increased processing rates by 0.6 of a percentage point to 79.75% of total capacity.
Elsewhere, the market will continue to watch for developments in France as the open-ended industrial action at French refineries and storage units of oil major Total SA intensifies. However due to substantial stocks of oil products, there is, for now, no supply or outage issue, a spokesman for the company said Friday.
The refineries have been producing at minimum levels since Tuesday, the spokesman said.
—Lananh Nguyen in London and Geraldine Amiel in Paris contributed to this article.
