Blog: Trading

Strong US Dollar and China's Economic Challenges Depress WTI Prices

May 02, 2023
Strong US Dollar and China's Economic Challenges Depress WTI Prices

The West Texas Intermediate (WTI) crude oil prices experienced a decline on Monday, fluctuating between a low of $74.58 and $76.65. The strengthening of the US Dollar index has led to a reduction in the prices of commodities, including oil, while investors have been focusing on US and Chinese data at the start of the week. The US Dollar received a boost as a result of JPMorgan Chase's acquisition of First Republic Bank, which was announced on Monday before the US Federal Reserve's policy decision on Wednesday.

In Chinese economic news, concerns about China's economic performance have led to a decline in oil prices. China's April manufacturing and non-manufacturing activities slowed more than expected, with the manufacturing PMI dropping by -2.7 to a 4-month low of 49.2 and the non-manufacturing PMI falling by -1.8 to 56.4.

On the other side of the Pacific, the April ISM manufacturing index rose by +0.8 to 46.1, which was stronger than expectations of 46.8. Additionally, March construction spending rose by +0.3% MoM, which was stronger than expectations of +0.1% MoM and represented the largest increase in 4 months.

In industry-specific news, according to the EIA report released last Wednesday, US crude oil inventories were -0.5% below the seasonal 5-year average as of April 21, gasoline inventories were -7.2% below the seasonal 5-year average, and distillate inventories were -12.4% below the 5-year seasonal average. In the week ended April 21, US crude oil production fell by -0.8% w/w to 12.2 million bpd, which was only 0.9 million bpd (-6.9%) below the Feb-2020 record-high of 13.1 million bpd.

Meanwhile, according to Baker Hughes, active US oil rigs remained unchanged at 591 rigs in the week ended April 28, which was moderately below the 2-1/2 year high of 627 rigs posted on December 2. US active oil rigs have more than tripled from the 17-year low of 172 rigs seen in Aug 2020, signaling an increase in US crude oil production capacity.

According to analysts at TD Securities, speculators have started to unwind their long exposure in WTI crude oil while adding short positions. The analysts noted that despite the latest inventory statistics showing robust product demand and dwindling inventories, crude markets were impacted by the reemergence of recessionary fears and bank liquidity concerns. However, the analysts concluded that as risk appetite stabilizes and fundamentals continue to look tighter in the second half of the year, CTAs could again turn buyers and offer support to crude oil markets in the coming weeks.

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