The Falling Dollar, like a Counterweight, Raised Oil

Since Monday, the oil market has had some good news, which boosted Brent crude past $50/barrel. The following factors provided a strong support for oil:

1. The weakening of the US dollar. The current situation with the Fed meeting has magnified things, and the fact that the rate has remained unchanged at 1.25% prompted investors to be newly concerned about the current state of the US economy. The very mixed statistics were a plus: they indicated a worsening of inflationary indicators, a decline in industrial output, and an increase in the number of initial jobless claims. Investors quite naturally have doubts about whether the Fed rate will be raised in September or even before the end of the year, and this is easing tension and triggering a series of sell-offs of the US dollar.

2. Data on US oil inventories on Wednesday revealed an even greater drop in oil supplies, which the market took as a positive sign: A drop of 7 million barrels compared to the predicted increase pushed Brent crude toward $51, even if only briefly.

3. Statements by OPEC (Saudi Arabia, UAE) representatives that they will prop up the oil market not only by cutting production, but also by cutting deliveries. This is a fairly risky, but necessary, step; it may somewhat bolster the mood of the other OPEC representatives and even give food for thought to countries such as the RF.

Stock markets, as always, suffered because of the weakening of the dollar: European indexes were trading mostly down, losing 0.25-0.8% on the day. Germany’s DAX managed to cross the 12250 boundary down, which might be considered as overcoming a psychological barrier. A slight strengthening of the US dollar at the end of the week will probably boost European indexes, but this will hardly change the situation globally.

Asian indexes surged and fell: Japan’s Nikkei 225 fell sharply at the beginning of the week, when the USD/JPY pair approached the 110 mark after strengthening significantly relative to the US dollar. The situation improved a little on Thursday, when the strengthening of the US dollar helped the majority of Asian assets end trading in positive territory, up 0.15-0.45%. Leading on the way up was Hong Kong’s Hang Seng, which rose 0.71%.

On Friday investors will again exercise caution in expectation of the release of new US data. Attention will also be focused on US drilling rigs, statistics on which are traditionally provided by Baker Hughes.

Yuri Prokudin, Olymp Trade

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