Strong Dollar Keeps Lid On Oil Price Rally

U.S. West Texas Intermediate crude oil futures are edging lower on Friday, giving back some of this week’s earlier gains.

The market is being pressured by the strengthening U.S. Dollar, which is making the dollar-denominated asset more expensive for foreign buyers, the easing of concerns over potential storm damage from Hurricane Nicholas and profit-taking after steep five day rally.

Traders seem to be shrugging off IEA and OPEC forecasts calling for a jump in future demand after pricing in this news earlier in the week, but this news is expected to be supportive over the longer-term.

Stronger US Dollar Could Weigh on Foreign Demand as Investors Await Fed Taper Decision

The dollar climbed to the higher end of recent ranges against other major currencies on Thursday, as traders looked to next week’s Federal Reserve policy meeting for indications on how soon the U.S. central bank will start to taper stimulus.

The Federal Open Market Committee’s (FOMC) two-day policy meeting ending September 22 should provide some clarity on the outlook for both tapering and eventual rate hikes.

Tapering typically lifts the dollar as it suggests the Fed is one step closer to tighter monetary policy. The stronger dollar could weigh on foreign demand for U.S. crude. Tapering also means the central bank will be buying fewer debt assets, in effect reducing the amount of dollars in circulation, which in turn lifts the currency’s value.

Threat to US Gulf Production from Hurricane Nicholas Eases

U.S. Gulf energy companies have been able to restore pipeline service and electricity quickly after Hurricane Nicholas passed through Texas, allowing them to focus on efforts to repair the damage caused weeks earlier by Hurricane Ida, Reuters reported.

“As Nicholas spared U.S. production from further disruptions, it is difficult to see how oil prices can increase further in the near term,” said Rystad Energy analyst Nishant Bhushan.

“Ida-affected oil production capacity continues to recover in the U.S.”

Long-Term Bullish Factors Outweigh Short-Term Bearish Concerns

Despite Friday’s weakness, in our opinion, the move is likely to only lead to a correction rather than a change in the trend. This is because the bullish fundamentals still outweigh the bearish fundamentals.

The bullish news includes low U.S. inventories. Oil prices jumped on Wednesday, supported by figures showing U.S. crude inventories fell by a bigger than expected 6.4 million barrels last week, with offshore oil facilities still recovering from the impact of Hurricane Ida.

Other bullish factors are signs of oil demand recovery. In closely watched reports this week, the International Energy Agency (IEA), the Organization of the Petroleum Exporting Countries (OPEC) and the U.S. government’s Energy Administration (EIA) all updated their world demand and supply estimates in their monthly reports.

According to the numbers, world oil demand will rise back above 100 million barrels per day, a level last reached in 2019, as soon as the second quarter of next year. This news offset worries that the pandemic may curb oil use for longer or for good.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. A trade through $72.61 will signal a resumption of the uptrend. A move through $61.11 will change the main trend to down.

The minor trend is up. It changed to up earlier in the week when buyers took out the minor top at $71.85.

Retracement Level Analysis

The minor range is $72.61 to $61.11. The market is currently trading on the strong side of its retracement zone at $68.22 to $66.86, making it new support.

The short-term range is $55.54 to $72.61. Its retracement zone at $64.08 to $62.06 is additional support.

The main range is $37.70 to $72.61. If the main trend changes to down then its retracement zone at $55.16 to $51.04 will become the primary downside target and value area.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending September 24 will be determined by trader reaction to $68.22 to $66.86. Look for a neutral tone if prices hold between these levels.

Bullish Scenario

A sustained move over $68.22 will indicate the presence of buyers. This could create the upside momentum needed to challenge the main top at $72.61. Taking out this level could extend the rally into the next upside target at $76.22.

Bearish Scenario

A sustained move under $66.86 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the short-term retracement zone at $64.08 to $62.06.

A failure at $62.06 could lead to a test of the main bottom at $61.11. Taking out this level will change the main trend to down and could trigger an acceleration to the downside with $55.54 to $55.16 the next likely target area.

Short-Term Outlook

The technical chart pattern indicates the upside bias is strengthening after forming a solid support base on the daily chart at $68.22 to $66.86.

However, some of this week’s rally was driven by speculators betting on long delays in the recovery of Gulf of Mexico oil production platforms and refineries from the damage created by Hurricane Ida and to some extent by Hurricane Nicholas.

They were right, per se, because earlier in the week, the process was moving slowly, but as of Friday, conditions have improved significantly. The price action on Friday suggests the market may be taking a breather amid profit-taking.

Nonetheless, there is room for further upside action after a near-term pullback because the longer-term outlook looks especially bullish if this week’s supply-demand reports from OPEC and the IEA prove to be valid. The two oil market experts said the balance of the year will be tight with demand expected to grow and non-OPEC supply, partly because of the impact of Hurricane Ida, will get tighter.

We expect to see some early weakness next week as traders continue to book profits from the recent price spike to the upside, however, we’re looking for buyers to return as they remain in the “buy the dip” mode with their decision supported by a bullish outlook for demand and tight supply.