Oil prices bounce back on weaker dollar

Oil prices rallied on Thursday, with WTI price touching the $78 per barrel level. If WTI price declines, it may encounter support near $71.3 per barrel, while resistance may be found near $79.0 per barrel.

A sharp build in US oil inventories drove oil prices down on Wednesday. The US Energy Information Administration reported on Wednesday an unexpectedly large rise in US stockpiles. US crude stockpiles rose by 12.0M barrels for the week to February 9th, far exceeding expectations of a rise by 3.3M barrels and following another rise by 5.5M barrels the week before. Oil prices bounced back on Thursday, however, supported by a weaker dollar. 

Supply concerns also provide support for oil prices, as the crisis in the Gaza area threatens to disrupt oil distribution. Tensions around the Red Sea area have been rising, raising concerns that hostilities may spread in the Middle East, affecting oil supply and distribution. Iran-backed Houthi militants are attacking commercial vessels in the Red Sea, raising concerns about oil supply. 

Oil prices have been rising on reports of ongoing military involvement of the US in the Middle East. The US launched airstrikes the week before against Iranian forces in retaliation for drone strikes against US troops. In addition, reports that Israel rejected a ceasefire offer from Hamas reignited concerns about the crisis spreading in the region.

The US Energy Information Administration revised its oil output forecasts for this year lower to 170K barrels per day, from the previous forecast of 290K, providing support for oil prices.

OPEC+ has decided to keep its oil output policy unchanged, maintaining the voluntary production cuts that have already been in place. The organization is enforcing substantial production cuts to keep oil prices high. The production cuts are limiting oil supply effectively, as OPEC oil output in January dropped by 410K barrels per day compared to December’s output. 

Oil prices are kept in check by a strong US dollar and high-interest rates. The Fed kept interest rates unchanged at its latest policy meeting in January, within a target range of 5.25% to 5.50. 

US inflation surprised on the upside on Tuesday, boosting the dollar and putting pressure on oil prices. Headline inflation rose by 3.1% year-on-year in January from a 3.4% print in November against expectations of a much lower reading of 2.9%. Markets were anticipating a sharp drop in inflation in January, which was not realized, dashing expectations of early Fed rate cuts.

China’s poor economic outlook is increasing concerns of reduced oil demand, putting a lid on oil prices, despite increasing geopolitical risks. Weak economic growth in China raises concerns about future demand, pushing oil prices down. 

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Written by:
Myrsini Giannouli

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