Oil prices dropped early on Monday as the U.S. dollar continues to strengthen ahead of the Fed’s much-anticipated policy meeting this week, which could announce the beginning of stimulus easing.
The oil market is down for a second consecutive day after Friday’s session settled in the red, as broader markets are anxiously watching whether the Federal Reserve will announce the start of asset purchase tapering at its meetings on Tuesday and Wednesday. The U.S. dollar gains were depressing the oil market as a stronger greenback makes oil buying more expensive for holders of other currencies.
The risk to U.S. oil production in the Gulf of Mexico is now diminishing as more output is being restored in the wake of Hurricane Ida. The return of more production from the U.S. offshore also weighed on oil prices early on Monday.
“As this week starts, much of the US market tightening on account of Ida is already baked into prices, while outages in offshore oil production and Louisiana refining capacity are continuing to ease,” Vanda Insights said in a note early on Monday.
The U.S. dollar and the Fed meeting will be the key external factors that will determine oil’s direction this week, apart from the usual U.S. inventory reports by the API and EIA, ING strategists Warren Patterson and Wenyu Yao say.
“All eyes will be on the FOMC meeting on Wednesday, where some believe we could already see the Fed announce its intentions to start tapering asset purchases, though our US economist is of the view that an announcement is more likely in November. A tapering announcement this week would likely put some downward pressure on oil and the broader commodities complex,” they noted.
“Last week the rally was halted at $76, the July 29 high, and more importantly it has raised the question whether current and improving fundamentals are strong enough to warrant a push above trendline resistance from the 2008 record peak, currently at $77,” Saxo Bank’s strategy team said in a Monday note.
“We don’t believe they are, therefore, leaving the market at risk of a short-term pull back, initially towards the 21-day moving average $72.75,” they added.
By Tsvetana Paraskova for Oilprice.com
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