Crude Oil Prices Edge Higher on Weaker US Dollar, EIA Report in Focus


CRUDE OIL OUTLOOK:

  • WTI crude oil attempts to challenge a key resistance level at US$ 41.50
  • The US Dollar index fell for a second day on stimulus hopes, improving sentiment
  • Oil traders eye key EIA data, expecting further drop in stockpiles amid softening demand outlook

WTI crude oil prices edged higher on Wednesday, challenging a key resistance level at US$ 41.50. Oil prices were boosted by stimulus hopes and a falling US Dollar after US House Representatives Speaker Nancy Pelosi self-imposed a deadline for the White House to approve the relief package. The DXY US Dollar index fell for a second day to 92.92 – the lowest level seen in a month.

Oil traders are also eyeing Wednesday’s EIA inventory reports, expecting a 1.02 million barrels fall in US crude oil stockpiles. Oil prices have historically exhibited a negative correlation with inventory changes, and the past 12 months’ data can be viewed on the chart below.

Source: DailyFX

In the medium term, falling crude stockpiles would likely underpin WTI prices. Total US inventories (excluding strategic petroleum reserves) have declined from 536.7 million barrels in Mid-July to 489.1 million barrels recently. Yet, the current level of US crude oil inventories is about 11% above the 5-year average for this time of year.

It is worth noting, however, that falling crude inventories should not mask a weakening demand outlook, which remains a key drag to oil prices. Recent EIA reports have pointed to declines in refinery inputs, gasoline production and distillate fuel production, as downstream demand weakened. Refineries operated at 75% of their operable capacity in the week ending October 9th. US crude oil imports have also fallen by nearly half a million barrels a day from the previous week.

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Flight data compiled by flightradar24 has also shown a slower pace of recovery in global flights numbers, which may serve as a good proxy for transportation fuel demand (chart below). The 7-day moving average of total flights tracked by the website was at 143,572 on October 20th, down by 26% from the same period last year. The number of daily flights appeared to have come off its recent peak seen in end September as the effects of pandemic-related measures may have resulted in less travel.

Crude Oil Prices Edge Higher on Weaker US Dollar, EIA Report in Focus

Source: Flightradar24

Technically, WTI crude oil prices look set to re-test a key resistance in the US$ 41.00-41.50 area (highlighted on the chart below). Breaking above this level may offer room for more upside potential towards US$ 43.8 – the previous high. A retreat from current levels may lead to further consolidation at around US$ 40.00 (20-Day SMA).

WTI Crude Oil PriceDaily Chart

Crude Oil Prices Edge Higher on Weaker US Dollar, EIA Report in Focus

IG Client Sentiment shows that 48.82% of retail traders are net-long oil, with the ratio of traders short to long at 1.05 to 1 (chart below). Compared to a day ago, retail traders have significantly increased their short positions (+27.5%) while reducing long positions (-16.8%). Compared to a week ago, the number of traders net-short has increased by 45% while the net long side has decreased by 19%. From a contrarian point of view, a drastic change in retail traders’ sentiment towards a shirt-side bias may infer further strengthening in crude oil prices.

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Crude Oil Prices Edge Higher on Weaker US Dollar, EIA Report in Focus

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— Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

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