US Oil Stockpile Amid a Weak USD – A Quick Fundamental Outlook

Posted Thursday, July 30, 2020 by
Arslan Butt • 3 min read

During Wednesday’s early Asian trading session, the WTI Crude Oil prices initially took modest bids above the mid-41 level, mainly after the US Energy Information Administration (EIA) reported a massive draw in crude oil inventories. But later, the on-going uncertainty surrounding the new COVID-19 aid package capped further gains in the crude oil prices. Apart from this, the second wave of coronavirus cases led to a low oil demand globally, which weighed on the oil prices and urged investors to refrain from placing any strong positions. Meanwhile, the weakness of the broad-based US dollar, triggered by the bearish bias of the US Federal Reserve (Fed) in its latest monetary policy meeting, became the key factor that capped oil prices further towards the downside, lending some support to it. At the press time, WTI Crude Oil is trading at $ 41.16 and consolidating in the range between 41.15 and 41.39.


Despite the massive draw in crude oil inventories, investors failed to place any meaningful bids on crude oil on the day, possibly due to the resurgence of coronavirus cases. The on-going war between the US and China also left a negative impact on the oil prices, capping additional gains. It should be noted that the surge in coronavirus infections around the globe raised fears of a negative rebound in terms of the fuel demand. 


As per the latest data, the number of cases reported globally almost exceeds 17 million, while 4.4 million confirmed cases and more than 150,000 deaths have been reported from the US alone, as per Johns Hopkins University data. In the meantime, China, South Korea and Japan have also reported a sharp rise in confirmed cases, since the beginning of the week. Japanese media reported that 365 new infections were recorded in Tokyo on Thursday. The number of virus cases in the US is picking up pace continuously, with an average of around 65,000 new cases being reported every day, which eventually put a brake on the recovery of economic activities and smashed hopes of a V-shaped recovery. 

Apart from the virus woes, crude oil’s failure to cheer the positive inventory data could also be associated with the escalation of the US-China tussle. The tit-for-tat closures of consulate offices in Houston and Chengdu have triggered the most serious escalation of tensions between the US and China so far. As a result, the two nations could be heading for a total breakdown of relations within the next few months, which could hurt the trade deal that currently exists between the two countries. 


Moreover, the on-going uncertainty surrounding the US fiscal package, triggered by the differences between members of the US Senate, also weighed on the risk sentiment and contributed to losses in crude oil. As per US President Donald Trump’s statement, the US administration and the Democrats were still greatly disassociated over the next round of US fiscal stimulus measures, and this also played a role in undermining the trading sentiment.


On the USD front, the broad-based US dollar reported losses on the day, dropping under the two-year low, as the Fed promised to curb damage from the coronavirus, by keeping interest rates near zero, on the back of non-stop reports of new infections that are hampering the economy. As a result, the low-interest rates are exerting pressure on the US dollar, causing it to weaken, and this has helped oil prices, making the black gold much more affordable globally. Elsewhere, the losses in the US dollar could also be associated with the policymakers’ deadlock over Phase 4 of the stimulus package. However, the losses in the US dollar helped to keep the oil prices higher, as the price of oil is inversely related to the price of the US dollar. Meanwhile, the US dollar index fell by 0.52% on Wednesday, steadying at around 93.275, the lowest level in more than two years.


The market players will keep their eyes on the critical US Q2 Preliminary GDP report for fresh trading impetus in crude oil. The traders will also keep their eyes on the USD price dynamics and coronavirus headlines, which could play a key role in influencing the intraday momentum. Good luck! 


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