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Oil Producers Brace for Impact of US Dollar Depreciation

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Crude oil prices 

August West Texas Intermediate crude oil futures contracts trading on the NYMEX rose slightly by 0.59% to close at $45.95 per barrel on July 15, 2016. Brent crude oil futures trading on the ICE also rose by 1.1% and settled at $47.61 per barrel.

Prices rose due to uncertainty over the supply outage in Nigeria. Oil ETFs like the United States Oil ETF (USO) and the ProShares Ultra Bloomberg Crude Oil ETF (UCO) rose by 1.1% and 2.1%, respectively, on July 15, 2016.

[marketrealist-chart id=1454229]

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Market support

The world’s second largest consumer and importer of crude oil is China. On July 15, 2016, China’s National Bureau of Statistics reported that China processed a record amount of crude oil in 1H16. This supported the crude oil market. China’s economic growth was better than expected in 2Q16, which supported crude oil demand along with slowing Chinese crude oil production. China’s economy grew by 6.7% in 2Q16 compared to Bloomberg estimates of 6.6% in the same period.

US dollar and crude oil  

The US Dollar Index depreciated by 0.08% in the early morning of Asian trade on July 18, 2016. Crude oil contracts are US-dollar-denominated. The depreciation of the US dollar makes crude oil cheaper. The better-than-expected June US jobs report on July 8 hinted that the US economy is improving despite Brexit concerns. Better-than-expected US retails sales and improving US industrial production supports the US economy, which will, in turn, support the US dollar. Thus, a strong economy boosting crude oil demand and a strong dollar pressuring crude prices will be opposing forces affecting crude oil in the coming week.

The PowerShares DB US Dollar Index Bullish ETF (UUP) tracks the performance of the US dollar. The above chart shows the relationship between the US dollar and crude oil.

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Uncertainty in crude oil prices affects oil producers such as Energy XXI (EXXI), Halcon Resources (HK), and Bonanza Creek Energy (BCEI). This uncertainty also impacts funds such as the United States Brent Oil ETF (BNO), the Guggenheim S&P 500 Equal Weight Energy ETF (RYE), and the ProShares UltraShort Bloomberg Crude Oil ETF (SCO). 

Series focus 

This series will focus on Cushing crude oil inventories, the US crude oil rig count, US Commodity Futures Trading Commission’s “Commitments of Traders” report, and some crude oil price forecasts.

WTI crude oil futures are trading close to a two-month low. Continue to the next part of this series for more detail on drivers for the crude oil market this week.

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