Crude Oil Continues to Dip Amid Stronger Dollar – Quick Fundamental Outlook!
Arslan Butt • 4 min read
During Thursday’s early Asian trading session, the WTI Crude Oil price failed to stop its declining streak of the previous day. It dropped from the high of $ 40 to $ 36.98, mainly after a surprisingly large US crude stockpile build for last week was reported by the government, which ultimately strengthened fears about a drop in demand for fuel, amid the worsening global coronavirus pandemic. Apart from this, the downbeat inventory numbers from the American Petroleum Institute (API), which were released on Tuesday, also put pressure on the crude oil prices.
Furthermore, the worries over the supply side, in the wake of the continuous rise in production in Libya, could also be considered one of the key factors that kept the oil prices under pressure. The lack of progress regarding an agreement on a US coronavirus relief package added further pessimism, which had a negative effect on the crude oil prices. In the meantime, the fears of the geopolitical tensions between the US and China, also keep challenging the crude oil bulls. The broad-based US dollar strength, backed by the market risk-off mood, also played a major role in undermining the oil prices, as the price of oil is inversely related to the price of the US dollar. Crude oil is trading at $ 37.45, and consolidating in the range between 36.98 and 39.00.
As we have already mentioned, the latest unexpectedly large US crude stockpile build for last week, reported by the Energy Information Administration, bolstered concerns about the drop in the demand for fuel, amid the worsening global outbreak of COVID-19, which in turn undermined the sentiment surrounding the crude oil prices. On the data front, the crude oil inventories increased by 4.3 million barrels, versus expectations for an increase of 1.23 million barrels. That comes a week after crude stocks dropped by 1 million barrels. As a result, the crude oil prices plunged approximately 5% overnight, falling below the key $ 40 per barrel support.
Apart from the data, the market risk sentiment was under pressure from the growing worries over the continuous surge in new coronavirus cases. Meanwhile, the political uncertainty in the US and the lack of progress in the US stimulus talks further dampened the market trading sentiment, which has kept the crude oil prices under pressure, as we know that the second wave of coronavirus infections is intensifying across the United States, Russia, France and many other countries, which is threatening the global economic prospect. As per the latest information, the United States reported approximately 74,300 new coronavirus cases, pushing the country’s daily average over the past week above 71,000.
In Europe, the number of coronavirus cases hit the highest level ever, with more than 52,000 new infections on Sunday, resulting in France preparing for a fresh lockdown. Elsewhere, Spain has also declared a national emergency, and a night-time curfew has been imposed.
Besides the virus woes, another reason behind the investors’ cautious sentiment could also be associated with the long-lasting US-China tussle, over the potential sale of American-made missiles to Taiwan, which is continuously picking up pace. On the flip side, the prevalent uncertainty over the final result of the US presidential election also dampened the market mood. As per the latest report, the national polls indicate that Democrat rival Joe Biden has a lead over Republican incumbent President Donald Trump.
On the USD front, the broad-based US dollar managed to keep its gains throughout the previous session, as the traders are still cheering the risk-off marker mood. However, the gains in the US dollar seem rather unaffected by the intensifying political uncertainty, ahead of the upcoming US presidential election on November 3. However, the gains in the greenback could be short-lived or temporary, due to the worries that the economic recovery in the US could grind to a halt because of the resurgence of coronavirus cases. Besides this, the gains in the US dollar were further boosted by a lack of progress regarding the US stimulus package, which has put traders in a cautious mood. Thus, the gains in the US dollar have become the key factor that has kept the crude oil prices under pressure, as the price of oil is inversely related to the price of the US dollar. However, the gains in the greenback have kept the currency pair under pressure. Meanwhile, the dollar index, which pits the dollar against a basket of 6 major currencies, stands at 93.472.
Across the pond, the reason for the losses in crude could also be associated with the reports suggesting that the production in Libya, one of the members of the Organization of the Petroleum Exporting Countries, is expected to return to full capacity, after the force majeure was lifted on the Sharara field.
On the contrary, Saudi Arabia and Russia showed their willingness to extend their oil production cuts and postpone planned increases when they meet for talks with their OPEC+ partners at the end of November, which might help to limit deeper losses in the oil prices.
In the meantime, the declines in the crude oil prices were capped by the possible drop in US production, as oil companies started shutting offshore rigs, due to a hurricane approaching the Gulf of Mexico. It is worth recalling that Louisiana is set to face the 6th lashing from a Gulf Coast system this year, as Tropical Storm Zeta speeds off the Yucatan Peninsula, bringing high winds and rain to a region that is still reeling from a series of storms.
Looking forward, the market traders will keep their eyes on the movement of the USD, due to the lack of major data/events on the day. Furthermore, the risk catalysts, like geopolitics and the virus woes, not to forget the Brexit, will also be key to watch for fresh direction. 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.