Oil Loses Ground As U.S. Dollar Strengthens After Powell’s Comments

Oil Video 27.08.20.

Hurricane Laura Weakens To Category 2 Storm

Hurricane Laura, which was has recently pushed WTI oil to test the resistance at $43.50, made landfall as a Category 4 storm but then weakened to Category 2 storm.

At this point, traders do not expect that oil infrastructure will get significant damage so oil prices have lost their previous upside momentum.

The U.S. oil industry has developed extensive experience with hurricane-related problems so the market expects that oil production in the U.S. Gulf of Mexico will be restarted in a quick fashion.

Another factor that did not allow oil prices to gain more momentum is the high inventory level. While crude oil inventories continue to decline, they remain 15% above the five-year average for this time of the year.

In the current situation, inventories will remain high even if production shutdowns last long. The oil market has plenty of work to do in order to bring inventories down to normal levels, so sustainable oil price upside will require a steady decline in inventory levels.

In A Bearish Move For Oil, The U.S. Dollar Manages To Rebound After Powell’s Comments

As expected, the Fed Chair Jerome Powell stated that the Fed would adopt an average inflation target of 2%. In practice, this means that the Fed will not raise rates once inflation gets above 2%. Instead, the Fed will allow inflation to increase in order to support the economy.

Since inflation is currently below the 2% target, adopting an average target of 2% will allow the central bank to deal with higher inflation for months.

At the same time, Powell stated that a full job recovery could take years which is a negative catalyst for oil prices.

The key near-term problem for oil is the sudden rebound of the U.S. dollar which has found itself under pressure right after the start of Powell’s speech. The U.S. Dollar Index, which measures the strength of the U.S. dollar against a broad basket of currencies, is currently trying to get above the 20 EMA at 93.35.

If this attempt is successful, the U.S. dollar will gain more upside momentum and put additional pressure on dollar-denominated commodities, including oil.

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