Oil Prices Under Pressure From A Strong Dollar

U.S. West Texas Intermediate crude oil futures are edging lower on Friday, putting the market in a position to finish the week with a loss. The usual supply and demand factors may have taken a back seat this week to the U.S. Dollar, which continued to firm on expectations that the U.S. Federal Reserve will speed up the pace of its interest rate hikes in an effort to tame inflation.

Crude oil bulls are also grappling with the possibility the Biden administration might release oil from the U.S. Strategic Petroleum Reserve to cool prices. Meanwhile, a new forecast from OPEC that showed world oil demand for the fourth quarter could also drop is raising additional concerns.

Dollar Climbs as US Inflation Surge Fuels Rate Hike Speculation, Dampening Foreign Demand for Crude

The government reported on Wednesday that consumer inflation (CPI) surged at its fastest rate in 30 years. The news fueled a wave of fear in the market on the thought that both the White House and the U.S. Federal Reserve may take action to stem the rise in prices.

The news also drove Treasury yields sharply higher, pulling up the U.S. Dollar. The strong dollar weighed on crude oil on the notion it would drive down foreign demand for the dollar-denominated commodity.

More Supply May Be Coming

Also weighing on prices was speculation the Biden Administration would tap the strategic reserve for crude oil and gasoline in an effort to drive down prices for consumers ahead of winter. A price drop by these two commodities would also weigh on both producer and consumer inflation.

Reuters reported that Biden said he asked the National Economic Council to work to reduce energy costs and the Federal Trade Commission to push back on market manipulation in the energy sector in a larger effort to reverse inflation.

US Crude Stocks Edge Up, Fuel Inventories Down - EIA

U.S. crude stocks rose last week, in part due to an injection into commercial supplies from the U.S. strategic reserves, while inventories of gasoline and distillates like diesel declined further, the Energy Information Administration said on Wednesday.

Crude inventories rose by 1 million barrels in the week to November 5, compared with analysts' expectations for an increase of 2.1 million barrels. The increase was due in part to a 3.1 million-barrel release from the U.S. Strategic Petroleum Reserve, the largest since July 2017.

Gasoline stocks fell by 1.6 million barrels, the fifth consecutive week of draws for the most-used U.S. fuel. Overall stocks are at levels not seen since November 2017.

Distillate stocks, which include diesel and jet fuel, were down as well, dropping by 2.6 million barrels, versus expectations for a 1.1 million barrels drop. Distillate stocks are at their lowest since April 2020.

Crude stocks at the Cushing, Oklahoma, delivery hub fell by 34,000 barrels, the EIA said.

Weekly Technical Analysis

Weekly January WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. However, momentum shifted to the downside with the confirmation of the closing price reversal top from the week ending October 29.  

A trade through $83.83 will negate the closing price reversal top and signal a resumption of the downtrend. A move through $60.77 will change the main trend to down.

Retracement Level Analysis

The minor range is $60.77 to $83.83. The market is currently trading on the strong side of its 50% level at $72.30, making it the nearest support.

The short-term range is $55.30 to $83.83. Its 50% level at $69.57 is the best support. This price is controlling the near-term direction of the market.  

Additional support levels come in at $66.51, $61.04 and $57.93 to $51.81.

The retracement zone targets will move up as the market moves higher.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending November 19 will be determined by trader reaction to $80.53.

Bullish Scenario

A sustained move over $80.53 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for a possible surge into $83.83. This is a potential trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under $80.53 will signal the presence of sellers. Taking out $77.23 will indicate the selling pressure is getting stronger. This could create the downside momentum needed to complete a two- to three-week correction or test of $72.30

Short-Term Outlook

Continue to monitor those EIA fuel numbers. The decline in stocks came even as refiners ramped up activity in the most recent week, boosting utilization rates by 0.4 percentage points to 86.7% of overall capacity. Refinery crude runs rose by 343,000 barrels per day.

What this means is demand is sucking up gasoline as soon as it's produced.

The question is, even with the release of oil and gas from the strategic reserve, will it satisfy the country's current demand needs?

The EIA report revealed some oil was already released last week for commercial use. But Friday's price action suggests more may be coming.

In my opinion, all of the news this week is short-term bearish. As long as crude oil demand continues to rebound faster than supply, prices will remain underpinned.

However, all of this could change if OPEC is right in its forecast that cut world oil demand for the fourth quarter by 330,000 barrels per day (bpd) from last month's forecast due to high energy prices that could hamper recovery from the economic fallout from the COVID-19 pandemic.

If demand drops enough, OPEC and its allies may decide to pause their plan to increase output by 400,000 bpd. If they don't make the move then oil supply could surge again, putting pressure on prices.

And don't forget about the possibility of a new wave in COVID cases as the Northern Hemisphere begins winter.