Crude Oil Succeeds in Maintaining the Bullish Bias of the Previous Session – A Fundamental Outlook!
Arslan Butt • 3 min read
During Friday’s early Asian trading session, the WTI Crude Oil prices succeeded in extending their gains of the previous day, remaining bullish well above the mid-$ 40.00 level, as strong US economic data fueled the hopes of economic recovery in the US. This tends to underpin the fuel demand and contribute towards gains in the crude oil prices. Moreover, the sentiment surrounding crude oil improved further on Thursday, after the Energy Information Administration reported a crude oil inventory decline of 1 million barrels for the week ending October 16. On the other hand, the gains in the crude oil prices could also be attributed to optimism over the US fiscal package, which is keeping the market trading sentiment positive and extending support to the crude oil prices.
On the contrary, the strenght of the broad-based US dollar, backed by the upbeat US data, has become the key factor that is capping any further upside momentum for the crude oil prices. Besides this, the gains in crude oil were further capped by the continuous rise in production in Libya, which is now expected to be producing at over 500,000 barrels a day, from barely 100,000 barrels a day. Across the pond, the fears of the geopolitical tension between the US, and Russia and Iran, keep challenging the crude oil bulls. Furthermore, the number of coronavirus cases is increasing outside of Europe’s epicenter, which is raising doubts over the recovery in the global fuel demand. This has become a key factor that is keeping a lid on any additional gains in the crude oil prices. WTI Crude Oil is currently trading at 40.64, and consolidating in the range between 39.71 and 41.01.
Despite the fears of a no-deal Brexit and the geopolitical tension between the US and Russia, not to forget the record monthly increase in COVID-19 cases in the US, the market trading sentiment extended its positive tone of earlier in the day, thanks to Thursday’s release of better-than-expected US Initial Weekly Jobless Claims, which raised hopes regarding the US economic recovery and underpinned the crude oil prices. On the data front, the number of Americans who filed for unemployment insurance, for the first time, declined to 787K last week as per the data published by the US Department of Labor (DOL). However, the figures were well below the expected 860K, and the previous month’s numbers were also revised down to 842K from the 898K reported earlier.
Besides this, the reasons for the risk-on market trading sentiment could be attributed to the developments regarding the US fiscal stimulus. It should be noted that House Speaker Nancy Pelosi says that it is necessary to reach an agreement. In the meantime, the Democratic leader has also said that progress has been made on a stimulus package. Let me remind you that the Democrats and the Republicans have been squabbling over a package worth around $ 2 trillion, which is intended to support the recover of the economy from the coronavirus crisis. However, the positive developments surrounding the US fiscal stimulus tend to underpin the sentiment with regard to the crude oil prices.
Despite the risk-on sentiment, the broad-based US dollar succeeded in extending its gains of the previous session, taking further bids during the early Asian session, due to strong data from the US economy. This fueled the hopes regarding the recovery of the US economy, and underpinned the American dollar. However, the gains in the US dollar have become the key factor that has kept a lid on any additional gains in the crude oil prices, as the price of oil is inversely related to the price of the US dollar. Meanwhile, the Dollar Index, which tracks the greenback against a basket of other currencies, increased by 0.4% ,to 92.97, after hitting a 7-week low of 92.46 on Wednesday.
Elsewhere, the gains in crude oil were capped by the on-going differences between the UK and the European Union (EU), concerning thorny issues like fisheries and a level playing field. Besides this, fears of the geopolitical tension between the US, and Russia and Iran, also played a major role in capping oil price gains.
Moreover, the mixed sentiment surrounding the crude oil prices could also be associated with the renewed lockdown restrictions, in an effort to stop the second wave of the coronavirus, which has ultimately fueled concerns over the slower recovery in the fuel demand, therefore capping gains in oil prices. As per the latest Johns Hopkins University data report, approximately half of the US states are registering monthly records in terms of new cases. Meanwhile, the Australian state of Victoria also recorded high numbers of new infections, having broken the 14-day average.
Looking forward, market traders will keep their eyes on the movement of the USD, due to the lack of major data/events on the day. However, the final presidential debate between President Donald Trump and his Democratic rival Joe Biden, will be key to watch. Furthermore, the risk catalysts, like geopolitics and the coronavirus woes, not to forget the Brexit, have not lost any significance. Good luck!
About the author
Arslan Butt is our Lead Commodities and Indices Analyst. Arslan is a professional market analyst and day trader. He holds an MBA in Behavioral Finance and is working towards his Ph.D. Before joining FX Leaders Arslan served as a senior analyst in a major brokerage firm. Arslan is also an experienced instructor and public speaker.