- The dollar strengthened on Wednesday after a set of better-than-expected US economic data.
- US crude inventories jumped by 7.7 million barrels last week.
- Trump has warned of high tariffs on Russia that could cause oil supply shortages.
Oil paused its rally on Thursday amid pressure from a strong dollar and downbeat crude inventories data. However, there is still upside potential as market participants grapple with likely supply shortages due to looming sanctions on Russia.
US private jobs (Source: ADP Research)
The dollar strengthened on Wednesday after a set of better-than-expected US economic data. The first report revealed that the economy added 104,000 new jobs in July, compared to the forecast of 77,000. The jump indicated resilience in the labor market.
Another report revealed that the US economy expanded by 3.0%, beating the forecast of 2.5%. The expansion eased worries about a slowdown caused by Trump’s tariffs. These reports supported a rally in the dollar, which made oil more expensive for foreign buyers. However, a strong economy will support demand for oil in the long term.
Meanwhile, market participants also focused on data showing weak crude demand last week. US crude inventories jumped by 7.7 million barrels last week. Meanwhile, economists had expected a 1.3 million barrel drop. However, analysts cited weaker exports as the main reason for the increase.
Elsewhere, the Fed kept interest rates unchanged as expected. However, two policymakers voted for a rate cut, indicating less caution that could lead to a more dovish outlook.
Oil has rallied this week as traders await Trump’s tariff deadlines, especially those on Russia. The US president has reduced the timeframe for Russia to make progress on ending the war to 10-12 days. If there is no progress in that time, Trump has warned of high tariffs that could cause oil supply shortages. Such an outcome would tighten the market and boost oil prices.
Meanwhile, there have been fewer concerns about a likely global trade war after the US signed more trade deals with Japan and the European Union. This has eased worries about the global economy and demand for oil.
However, talks between the US and China have been extended, and there is no sign that the two will agree soon. China is the second-largest oil consumer in the world. High tariffs and a likely trade war with the US would hurt the outlook for oil demand and weigh on prices.
Meanwhile, market participants are gearing up for the US nonfarm payrolls report.
