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U.S. Dollar Damaging Hopes Of A Rally In Oil

U.S. Dollar Damaging Hopes Of A Rally In Oil

Remember, remember the 5th November, for Guy Fawkes attempted to blow up the UK Houses of Parliament some 410 years ago. Onward to today, and bulls are trying to ignite a rally after prices exploded to the downside yesterday.

Fireworks abound, for not only is it bonfire night, but it is also Nonfarm Friday Eve. Tomorrow we get the latest official monthly jobs report, which will help to endorse or discourage an interest rate hike in the U.S. next month. Hence, as this pushes and prods the U.S. dollar around, it is directing the commodity complex also (case in point: yesterday’s super-charged U.S. dollar sent crude prices spiraling lower).

Things have been quiet in Asia on the economic data front overnight, while there were a few tidbits of note out of Europe. One was Eurozone tales of retail sales, which were down -0.1 percent in September on the prior month, versus the expectation of a 0.2 percent rise, while the Bank of England kept interest rates at 0.5 percent – where they have been since March 2009 (hark, 80 months and counting) amid a dampened inflation outlook.

Brazil’s services PMI showed an ongoing swift pace of contraction, but rebounding from the lows of recent months. Onto the U.S., and weekly jobless claims rose to a 5-week high of 276,000, not boding all that well for tomorrow’s official monthly unemployment data. Related: OPEC Infighting Reaching Critical Levels

Onto our dearly beloved energy complex, and natural gas is set to reach a record level of storage with today’s report. Consensus is for a ~60 Bcf injection, which is well below last year’s +90 Bcf, but just a smidge above the five-year average of +58 Bcf. With storage currently sat at 3,877 Bcf, we only need an injection of +53 Bcf to surpass 2012’s peak of 3,929 Bcf. Game on!

(Click to enlarge)

Switching from gas to oil, and the crude complex is trying to muster a bounce after yesterday’s drubbing, but once again faces a buffeting from the U.S. dollar. Immediate tighter supply concerns offset the longer term picture of ongoing oversupply, with a worker’s strike in Brazil at state-run oil producer Petrobras impacting production. According to estimates, about 140,000 barrels per day are offline, or ~6.5 percent of total production. Related: North Dakota No Longer Attractive For Drillers Or Refiners

As we mentioned yesterday, the U.S. trade deficit has narrowed to $40.8 billion, driven by petroleum imports dropping to their lowest level since May 2004 (APLBTE….all paths lead back to energy). Given the slump in oil prices, trade with Canada has dropped considerably to $438.1 billion year-to-date. Meanwhile, trade in goods with China has reached $441.6 billion. This is the first time China has surpassed Canada in data going back to 1985.

Finally, in relation to the impact of an interest rate hike in the U.S. on the movement of the U.S. dollar, the below is rather telling. Given the inverse relationship between oil and the dollar, ongoing headwinds for a crude rally seem to be the order of the day. Related: Oil Sands Still Face Pipeline Problems

 

By Matt Smith

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