When markets bubble up, there always comes a moment when traders aim to reap profits and reduce their portfolio’s risk.
As the US dollar is usually a safe haven, its exchange rate against other currencies strengthens, a development that supplements the risk aversion environment and affects commodity prices, especially oil.
Oil gets more expensive for non-dollar markets and prices get a hit as a result, a bearish move backed by the stock market itself in an environment of risk aversion.
The length of the loss for oil prices today is extended also due to supply signals, as US production in the Gulf of Mexico returns and as rig activity continues to rise, which hints more output going forward.
In the US, the Federal Reserve meeting is set for this week, post which the Chairman is scheduled to address the nation.
The market is anticipating the lifting of monetary stimulus before the end of 2021 and traders are on the lookout for the rollback process and timeline.
The markets may be worried that a too aggressive tightening plan will be announced, which could dampen cash liquidity and strengthen further the dollar against other currencies.
Additionally, if near-term interest rates get tightened, oil demand can be negatively affected as a result of the policy’s effect on the US GDP.
In our view, the Fed will most likely tread very carefully and watch the market’s reactions closely in order to avoid a move which could dampen the ongoing recovery from the largest external shock since the Great Depression.
On the supply side of crude oil, the US Gulf of Mexico output recovery is improving day by day post-Hurricane Ida, trimming prices that have risen on the back of production outages.
The production recovery is gradual but progresses realistically, as indeed some outages are expected to last all the way till the last week of September, with the accumulated loss edging towards 30 million barrels for the month.
The weekly rig count suggested stronger fourth quarter crude oil production in the US, as more rigs were added last week, the second straight weekly gain.
Overall, the whole week is expected quite busy and action-packed for oil traders as they will be looking for clues from the Fed meeting, while the price direction will also depend on crude stock data for last week.
If crude inventories continue to go down, with the so-far restored oil production unable to reverse the trend, prices will benefit.
For the moment, the market is pricing in the supply trend and today’s risk relief, which definitely woke up the bears.