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U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading slightly higher on Tuesday after posting a dramatic reversal to the downside the previous sessions. Traders are saying that oil prices are being supported by investors moving into riskier assets as the traditional safe-haven U.S. Dollar continues to get hammered into multi-year lows.
At 08:41 GMT, October WTI crude oil futures are trading $43.05, up $0.44 or +1.03% and December Brent crude oil is at $46.16, up $0.50 or +1.10%.
Brent closed out August up 7.5% for a fifth successive monthly price rise. WTI logged a fourth monthly gain at 5.8% after hitting a five-month high of $43.78 a barrel on August 26 when Hurricane Laura struck.
Demand Worries, Oversupply Concerns
Crude oil prices fell on Monday, with Brent slipping from a five-month high as global demand remained below pre-COVID levels while U.S. production edged up.
Still, with key economies around the world limply recovering from coronavirus lockdowns, the market could remain oversupplied with fuel.
Traders fear the issue over demand isn’t going to go away over the near-term. Furthermore, U.S. oil production climbed 420,000 barrels per day in June to 10.44 million barrels a day, the U.S. Energy Information Administration said, putting further pressure on prices.
Weak Dollar – Good for Commodities?
Prices are up on Tuesday because text book traders are following the premise that a weaker U.S. Dollar is good for commodity prices. A lower greenback is supposed to be good for crude oil because the asset is priced in dollars which makes it more attractive to foreign buyers.
A weak U.S. Dollar is helping to draw fresh foreign demand for dollar-denominated crude oil after the Fed made an accommodative announcement last week that nearly guarantees interest rates would remain close to zero percent for several more years.
However, there are some who are questioning whether the weaker U.S. Dollar will actually help to drive up demand.
“We believe that the impact of a cheaper dollar from current levels will see a minimal impact on crude purchases, irrespective of slightly more favorable crude pricing,” RBC Capital’s Mike Tran said in an August 27 note.
“The relationship between demand and price elasticity is blunted in the current environment, because oil is already cheap and readily available and there currently exist a dearth of buyers.”
Short-Term Outlook
Crude oil continues to face hurdles going forward that could slow down the rally, or bring the move to a halt, namely demand struggles as COVID-19 cases continue to increase globally and excessive supplies, particularly gasoline and distillates. We continue to expect a rangebound trade although the weaker U.S. Dollar may start to attract speculative bulls into the market. The weaker U.S. Dollar is also likely to prevent a price collapse too.