Oil rises despite USD strengthening

02.02.2021 11:51|Conotoxia Ltd Analyst Team

While investors were heavily focused on the US equity and silver markets, the price of crude oil imperceptibly reached its highest level in a year, exceeding USD 54 per WTI barrel. It is worth noting that the increases take place against the backdrop of a relatively stronger US dollar, which may indicate broad demand for crude.

It seems that the positive correlation between the US dollar and crude oil has been observed on low time intervals since the beginning of the year. When the U.S. dollar index was below the 90 point level, the price of WTI crude oil oscillated at $47 per barrel. Since then, the US Dollar Index has risen to almost 91 points and the price of a barrel of WTI has jumped to $54. This could mean one thing, that oil buyers may be immune to the rise in the USD, and that demand is so strong that it could raise the price of a barrel more than it raises the price of the dollar.

As a result, oil prices rose Tuesday to their highest level in a year, extending gains from the previous session. Traders were confident that global oil demand could return to pre-pandemic levels as several more COVID vaccines are allowed to come into use and as production and distribution problems are resolved. Sentiment was also bolstered by strong compliance with OPEC+ commitments to cut production in January and the start of Saudi Arabia's voluntary 1 million barrels per day supply cut from February 1. However, concerns over the rising global COVID-19 outbreak persist, and travel restrictions in China ahead of the Lunar New Year holiday keep oil demand in the region relatively weak.

Turning to the U.S. dollar, the U.S. dollar appears to have a quarter of corrective unwinding ahead of it. Looking at institutional investors' positioning on EUR contracts, we can see that as the rate rose above 1.2300, the number of net long positions failed to establish a new high, CFTC data shows. In August, when EUR/USD was at 1.2000, the total number of net long positions was 37095, while in mid-January it was less than 34000 contracts. As a result, a divergence has emerged where a more expensive euro is not supported by an increase in investor positions. This, in turn, could be one sign of a weakening trend with the possibility of a correction towards 1.16-1.17. Thus, a strengthening dollar, if it happens, will test many markets as to whether they will be able to sustain high levels or continue to rise as oil seems to be rising now.

Daniel Kostecki, główny analityk Conotoxia Ltd. (usługa Forex Cinkciarz.pl)

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