Oil down 3% despite weak dollar; U.S. inventories awaited

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By Barani Krishnan

AiVIF.com -- Oil prices tumbled 3% on Tuesday despite a weaker dollar as Chinese cities widened their Covid dragnet and as players on crude futures markets tried to limit exposure ahead of weekly U.S. inventory data due on Wednesday.

Other than Tuesday’s mild rally on Wall Street, most U.S. markets saw dampened trading as investors awaited the outcome of the midterm election where President Joe Biden and Democrats face challenge to their control of the House of Representatives and the Senate. 

Nonpartisan forecasts and opinion polls suggested a strong chance of Republicans winning a House majority and a tight race for Senate control, Reuters reported. A surprise victory for Democrats, however, could raise concerns about tech-sector regulation as well as budget spending that could add to already-high inflation.

Investors are also awaiting a key inflation reading due on Thursday, which is expected to show easing in consumer prices and provide further clues on whether the Federal Reserve could soften its campaign of aggressive U.S. rate hikes.

New York-traded West Texas Intermediate, the benchmark for U.S. crude, settled Tuesday’s trading down $2.88, or 3.14%, at $88.91 per barrel, extending the previous session’s near 1% slide. The session low was $88.69.

London-traded Brent, the global benchmark for oil, settled down $2.56, or 2.6%, at $95.36 after a session low at $95.13. On Monday, Brent slipped by 0.7%.

Crude prices fell as reports of a spike in new coronavirus cases in several Chinese cities, especially Guangzhou, the global manufacturing hub that officials are trying to prevent from becoming China's latest COVID-19 epicenter, to avoid a Shanghai-style multi-month lockdown.

The drop in oil markets came despite the dollar’s tumble to a six-week low and a slump in Treasury yields amid the higher risk appetite as investors took the U.S. midterm election in their stride and braced for Thursday's pivotal Consumer Price Index report for October. 

Economists are expecting the CPI reading to show an annual increase of 8.0% and a monthly growth of 0.6%.

Market watchers generally expect price pressures to have cooled from the 40-year highs seen in  June, after a barrage of outsize rate hikes by the Fed. 

Since March, the central bank has raised interest rates six times in a bid to contain inflation, with four jumbo-sized hikes of 75 basis points from June onwards that brought rates to a peak of 400 basis points from just 25 in March.

If the October CPI report signals a definitive retreat in inflation, the Fed could revert to a rate hike of the 50-basis points that it used in May. Such a drop would be positive for oil and other dollar-denominated commodities though as it lowers transaction/acquisition cost for users of the euro and other non-dollar currencies. The Dollar Index, which pits the greenback against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, remained below the key 110 mark on Tuesday versus Thursday’s three-week high of 113.035.

The caveat for oil from a lower CPI report is that crude prices should not rise beyond $100 a barrel if one wants to keep a lid on inflation — given the influence of energy on almost all economic activity.

Oil market participants were also on the lookout for U.S. weekly inventory data, due after market settlement from API, or The American Petroleum Institute.

The API will release at approximately 4:30 PM ET (21:30 GMT) a snapshot of closing balances on U.S. crude, gasoline and distillates for the week ended Nov. 4. The numbers serve as a precursor to official inventory data on the same due from the U.S. Energy Information Administration on Wednesday.

For last week, analysts tracked by AiVIF.com expect the EIA to report a crude stockpile build of 1.36 million barrels, versus the 3.115-million barrel reduction reported during the week to Oct. 28.

On the gasoline inventory front, the consensus is for a draw of 1.08 million barrels over the 1.257 million-barrel decline in the previous week.

With distillate stockpiles, the expectation is for a drop of 800,000 barrels versus the prior week’s gain of 427,000.