Providing coverage of Alaska and northern Canada's oil and gas industry
September 2023

Vol. 28, No.38 Week of September 17, 2023

Oil, dollar both up

Correlation anomaly: oil typically falls when US dollar rises

Steve Sutherlin

Petroleum News

Alaska North Slope crude wended its way upward in the five trading days ending Sept. 13, up $1.30 over the week from its Sept. 6 close of $93.40 to settle at $94.70, notching a 5-cent loss on the day.

West Texas Intermediate shed 32 cents on the day to close at $88.52 and Brent slipped 18 cents to close at $91.88 -- a $2.82 discount to ANS.

Crude prices struck a 10-month high Sept. 12, adding to a prolonged upsurge which counterintuitively occurred in concert with muscular performance from the U.S. dollar. Normally the dollar and oil display an inverse correlation. When the dollar rises, oil -- being a dollar-denominated commodity -- gets more expensive for buyers that must convert their own currencies into dollars to buy oil.

Crude traders shook off the anomaly and focused on supply concerns rising from production cuts by Saudi Arabia and Russia, along with indications that demand -- particularly in the United States and China -- was likely to move higher in the second half of 2023.

ANS leapt $1.35 Sept. 12 to close at $94.74, while WTI vaulted $1.55 to close at $88.84 and Brent leapt $1.42 to close at $92.06.

As crude marched upward, the dollar turned in a record streak of weekly gains on hawkish signaling from the Federal Reserve that interest rates may remain higher for longer to fight persistent inflation growth. The Bloomberg Dollar Spot Index added an eighth straight week of gains -- a feat last seen in 2005.

The dollar's 14-day Relative Strength Index exceeded 70, a level widely considered to be an indication of an overbought market, but a Reuters poll of forex strategists released Sept. 7 said the risks to their dollar outlook were skewed to the upside.

The dollar's strength will be difficult to overcome for most major currencies by year-end, poll respondents said.

"We think dollar strength has got further to run and will sustain over the next three months," said Jane Foley, head of FX strategy at Rabobank.

According to the Federal Reserve Bank of St. Louis, higher U.S. interest rates cause international capital to flow from other countries to the United States, resulting in dollar appreciation.

"If the Fed raises interest rates while other central banks maintain or even lower their interest rates, then the return on savings is more attractive in the U.S. than in other countries," it said.

The oil price losses Sept. 13 -- measured in pennies -- were muted, considering U.S. Energy Information Administration data released the same day indicating an expansion of U.S. reserves for the week ending Sept. 8.

U.S. commercial crude oil inventories -- excluding the Strategic Petroleum Reserve -- gained 4.0 million barrels from the previous week to 420.6 million barrels, 2% below the five-year average for the time of year.

Total motor gasoline inventories also increased for the period, up 5.6 million barrels to 220.3 million barrels, 2% below the five-year average for the time of year.

ANS slipped 9 cents Sept. 11 to close at $93.39, as WTI dropped 22 cents to close at $87.29 and Brent shed a penny to close at $90.64.

ANS rose Sept. 8, up 77 cents to close at $93.49. WTS gained 64 cents to close at $87.51 and Brent rose 73 cents to close at $90.65.

On Sept. 7, ANS fell 69 cents to close at $92.71, while WTI fell 67 cents to close at $86.87 and Brent fell 68 cents to close at $89.92.

OPEC: healthy supply and demand expectations

Crude spot prices were buoyed in August by a futures price rally, which gained momentum on the back of healthy oil supply and demand expectations, according to the OPEC Monthly Oil Market Report released Sept. 12.

The report said physical crude market fundamentals held solid throughout August and September trading cycles, characterized by firm demand for crude in the spot market and a decline in U.S. crude stocks.

Increased global refinery intake, particularly in the United States and China, coupled with a spike in global refining margins revealed heightened demand for crude for refined products, providing impetus to spot prices, OPEC said.

China saw robust demand in the summer travel season, and a surge in Asia refining margins incentivized Chinese refineries to process more oil, OPEC said. Healthy demand from Asian buyers, including independent refiners in China, buoyed the value of sour crude prices.

Data from the National Bureau of Statistics showed a 3.6% month-on-month increase in China's oil refinery throughput in July to 63.1 million metric tons, it said.

In the United States, a substantial drawdown in commercial crude stocks positively impacted market dynamics, amid robust demand from domestic refiners and strong demand for exports, OPEC said, adding that robust refining margins -- specifically for diesel and jet fuel cracks -- and a tight diesel market lent support to the oil complex.

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