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

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

Margaret Yang, CFA, Strategist

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
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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.

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

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.

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 short-side bias may infer further strengthening in crude oil prices.

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

--- Written by Margaret Yang, Strategist for DailyFX.com

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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