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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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The Overlooked Factor Driving The Rally In Oil

The overall sentiment among oil traders is wary these days. The OPEC+ production cuts went into effect at the start of 2019, but it’s too early to say who is delivering on their promises and who is stalling. Demand seems to be all right but worry about a global economic slowdown persists. Amid all this, crude may get some support from the current trend in the U.S. dollar, according to Reuters’ John Kemp.

Kemp wrote last week that the greenback’s rally may be all but over, and when it started sliding, it would boost oil prices. An expensive dollar makes commodities and goods traded in the global reserve currency more expensive for buyers, but when it falls, these commodities and goods become more attractive and buying increases, eventually leading to higher prices.

Kemp explains that the strong dollar has served to improve the United States’ internal balance, keeping inflation low despite a tightening labor market, but at the same time it has had a negative effect on the external balance in the form of a deepening trade deficit. This may have to change, Kemp suggests, pointing to a similar fiscal policy pursued by the Reagan administration in the early 1980s. At the time, a strong dollar weighed on the U.S. economy so the administration pulled the strings of trading partners to curb their exports to the United States and strengthen their own currencies so the dollar could depreciate, making U.S. goods more competitive.

But the immediate future of the U.S. dollar is not the only tailwind for oil. In fact, some believe that algorithmic trading was behind the latest price drop. One of them is Investing.com senior analyst Haris Anwar, who told Forbes author Panos Mourdoukoutas that the recent oil sell-off was driven by machine trading. Related: Is WTI Set To Rally?

"Rather than saying that inmates are running the asylum, I think it's more appropriate to say that machines are running the oil market,” Mourdoukoutas said. “And that's pulverizing oil, with the few remaining bulls in the market unable to make any sense of what's going on, particularly when you have U.S. stockpile draws and Libyan force majeure. The narrative remains on the glut and the combination of record U.S., Saudi and Russian production."

Indeed, in the past any supply disruption in a producer as large as Libya would have had a quick positive effect on oil prices. Not this time, however, even though the force majeure on the country’s largest field has now been in place for more than two weeks, shaving off more than 300,000 bpd from daily production in addition to the OPEC cuts.

Another tailwind is the latest update from the U.S. shale patch. A quarterly survey by the Dallas Fed unveiled a decline in activity in the oil industry on the back of falling prices. This decline could persist and lead to a slowdown in production growth. This, in turn, should serve to moderate the current pessimism and maybe even shift it into optimistic territory if OPEC+ delivers on its agreement to remove 1.2 million bpd from global supply.

Oil is already on the rise, with Brent climbing closer to the US$60 mark and WTI even closer to US$50 a barrel. Yet the possibility of a strong rebound in prices remains a distant one. This time, the decline came very soon after the last one and everyone is cautious what they bet on.

By Irina Slav for Oilprice.com

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