Strong Dollar, Risk Aversion and Rising Supply Pressure Crude Oil

Crude oil futures tumbled early Wednesday, continuing the sell-off that took place on Tuesday. August futures in the U.S. reached a low of $46.15 before reversing back to $46.77, up $0.17 or +0.36%. The futures contract fell 5 percent to end at $46.60 yesterday as U.S. investors digested news of an OPEC increase in production.

Earlier in the session, Brent futures were down 18 cents at $47.78. On Tuesday, the futures contract settled down 4.3 percent at $47.96 a barrel.

Pressure on crude oil prices came from all fronts with heavy selling related to the strengthening dollar, rising risk aversion because of Brexit and actual supply and demand aspects of the market.

The dollar rose after the British Pound slumped to a 31-year low in early Wednesday trading, after three U.K. property funds were suspended in the face of a rush of redemption from investors fearing a slump in British property values.

Additionally, the Bank of England also took steps to ensure British banks keep on lending, by lowering the amount of capital banks must hold in reserve, as U.K. business confidence plunged.

Expectations of weak data from China this month are also having an effect on oil prices as investors expect weaker demand.

Recently, crude oil was supported artificially by a cut in output in Nigeria due to terrorist issues and in Canada after a wildfire shut down a major operation. Many investors thought that these two issues had helped bring the market into balance after a two-year supply glut. However, it looks as if supply is rising again and demand is set to fall on worries that Brexit will cause a recession in the U.K. and in Europe.

According to some sources, there are signs of abundant supply despite another militant attack on Nigeria’s oil industry. Traders said oil prices are being pressured by data from market intelligence firm Genscape that showed a build of 230,025 barrels at the Cushing, Oklahoma storage hub for U.S. crude futures, during the week to July 1.

Also influencing prices in a negative way is weakness in refined products especially gasoline. Without the support of the products and with a structure in crude oil that is weakening, many traders feel that it will be difficult for crude oil to maintain its upside bias that had been building since late January/early February.

The deterioration in the global economic outlook, financial market uncertainty and ripple effects on key area of oil demand growth are likely to exacerbate already-lackluster industrial demand growth trends.