Rebounding U.S. Dollar Causes Oil Price To Decline, But Demand Recovery Remains Intact

Meanwhile, Iran's boast of an imminent nuclear deal fails to sway traders: File Image/PixaBay

A long-brewing liquidation finally came to pass on Thursday as oil prices slumped the most in a month, triggered by a rising dollar affecting the sentiment of traders who had invested in commodities to guard against inflation.

After the U.S. Federal Reserve signalled that its easy monetary policy will soon come to an end, Brent dropped by 74 cents, or 1 percent, to $73.65 per barrel by 0103 GMT; West Texas Intermediate fell by 69 cents, or 1 percent, to $71.46 per barrel.

John Kilduff, founding partner at Again Capital, noted that "Everything commodity-related is down big; this is a liquidation that had been building up for weeks."

Edward Moya, senior market analyst at OANDA, added, "The Fed was expected to be on hold and punt this meeting, but they sent a clear message they are ready to start talking about tapering and that means the dollar is ripe for a rebound which should be a headwind for all commodities.

"Energy markets became so fixated over a robust summer travel season and Iran nuclear deal talks that they somewhat got blindsided by the Fed's hawkish surprise."

However, oil's overall recovery remains robust, and Citigroup Inc. said Brent could soon top $80 per barrel thanks to pent-up leisure demand released by the wildly successful global Covid vaccination rollouts.

Also, despite remarks from officials in Iran suggesting a nuclear deal is close to being revived, Energy Aspects said in a report that Tehran probably won't be able to bolster production or release stored supplies until the fourth quarter.

More encouraging new for oil on Thursday was provided by the Energy Information Administration, which revealed that U.S. crude oil stockpiles dropped sharply last week as refineries boosted operations to their highest since January 2020, signalling continued improvement in demand.

Plus, U.S. oil companies are reporting that drilling and well completions activity and pricing are edging higher, especially for those with specialized services or more productive equipment: "We are already beginning to see a positive increase in activity and an upturn in service pricing will hopefully be reflected in the coming months," said Stuart Wilson, chief executive of Packers Plus Energy Services.

Moya concluded, "This pullback in oil prices should be temporary as the fundamentals on both the supply and demand side should easily be able to compensate for a rebounding dollar."