Why are oil prices going down?

Despite renewed optimism, several factors tend to continue pushing oil prices downwards.

The past three weeks have been very volatile for oil with WTI trading at around $37 on Thursday. Just when it appeared the oil bulls were taking prices to pre-pandemic levels; the Bears showed their teeth by taking the markets on a downward spiral.

We can look at what has really made the markets move in the past fortnight and what the fate of the oil markets are in the short-term.

Why are prices down?

Strong dollar and gasoline demand

Oil prices settled lower last week, pressured by a stronger U.S. Dollar, which dampened demand for the dollar-denominated commodity. The strength of the dollar would come as a surprise as markets predicted the bearish pattern of the dollar. Still, in line with the inverse relationship, Dollar got stronger and oil crumbled. In addition to the fall of oil prices last week, it was also observed that there was weak demand for gasoline in the short term. There were also expectations that refinery demand for crude will weaken in the fall.

A report from the U.S. government showed shrinking domestic crude and gasoline inventories. It is expected that many refineries will soon stop operations to conduct usual maintenance. The double whammy of maintenance of refineries and downturn in summertime fuel consumption gave oil a bearish outlook. Until schools and offices open, we are faced with a possibility of low demand and this weighed on oil prices.

Refinery margins

The refined products market has remained weak, and this is no surprise given the impact on fuel consumption on the demand side. Very few Asian refiners are buying oil as they still have loads of oil bought when prices were low.

Iraqi rumors

There were murmurings from state media that Iraq was seeking exemption from cuts and this weighed down on oil prices. Although Iraq’s oil ministry denied the reports in state media that the country was considering an exemption from its production quotas and obligations, the rumor portrayed cracks in the wall of the OPEC accord. Notably, there have been compliance issues with Iraq and Nigeria, and any sort of uncertainty influences prices downwards.

Saudi OSP cuts.

Saudi Aramco devalued its October official selling prices for crude supplies to Asia and the US, as the company forecasted slow demand of oil from these areas. The pandemic is still a major bear card in this market and until there is an equitable distribution of vaccines, it would still be a factor to consider before placing oil positions.

What gave The Bulls momentum earlier?

The calm before the storm

Two weeks ago, the Gulf of Mexico, which appears to be one of the largest production areas of US Oil, was taken aback by magnanimous hurricane levels. Hurricane Laura approaches the Texas-Louisiana coast and many energy participants wondered how it will impact the energy sector as the areas affected is mostly important oil and petroleum area in America. There was a disruption in the Oil Production as around 1.6 million barrels per day of offshore crude oil production were stopped as production members in the Gulf of Mexico had fled the areas. That amounted to over 80% of U.S. offshore crude oil production in the Gulf of Mexico. This affected inventories and sent prices up as supply was taken off the market.

Weaker dollar

Another situation that gave Bulls momentum was the decline of the dollar during that same period. It is evident there is an inverse relationship between the US dollar strength and oil prices. Dollar faced a bashing against other currencies as the U.S. economy proposed to keep the dollar lower. This gave a lift to crude oil prices.

Vandana Hari, founder of Vanda Insights said “as far as fundamentals are concerned, there is really not much to move oil around either way, which is why we have seen it pretty range-bound but within that, continuing to grind higher because of a weaker dollar.”

Goldman Sachs outlook

In a statement released from Goldman Sachs, the investment bank said, “Key to the resilience of spot prices, despite stalling inventory draws this summer, has been the steady rally in long-dated prices,”

The statement was so bullish to the markets, it was recommended as an effective portfolio hedge against uncertainty in other sectors. Analysts saw this as a positive sign, and this sustained the bullish outlook on prices.

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