- Oil collapsed on Wednesday as the dollar rallied to an over seven-month high.
- The US CPI increased by 0.2% monthly and 2.6% annually.
- Data on Wednesday revealed that US crude inventories fell by 777,000 barrels.
Oil paused its decline and rebounded slightly on Thursday after reaching new lows in the previous session. Moreover, data on Wednesday revealed a bigger-than-expected drop in US crude inventories, indicating strong demand.
US inflation (Source: Bureau of Labor Statistics, Bloomberg)
Oil collapsed Wednesday as the dollar rallied to an over seven-month high amid optimism over Trump’s presidency. The rally came even as US inflation data supported bets for a December Fed rate cut. As expected, the US CPI increased by 0.2% monthly and 2.6% annually. Therefore, market bets for a December rate cut remained steady.
However, since inflation met forecasts, all focus returned to Trump’s presidency. Since he won the election, Treasury yields and the dollar have rallied strongly. Meanwhile, commodities priced in dollars, like oil, have suffered a drop in demand as they become more expensive to foreign buyers.
Trump has proposed reducing taxes and imposing import tariffs on countries like China. Therefore, business conditions will improve, and demand for local goods will surge. In time, the US economy will expand faster, and inflation might spike. In the long run, increased business activity and robust demand might boost oil prices. However, oil prices might fall if the Fed keeps borrowing costs high to cool demand.
Furthermore, there is a probability that Trump’s administration will put sanctions on Iran over the recent Middle East war. Trump supports Israel in the war and would, therefore, be against Iran. Sanctions on a significant oil producer would reduce oil supply and boost prices.
Meanwhile, data on Wednesday revealed that US crude inventories fell by 777,000 barrels compared to forecasts of a 100,000 barrel increase. The drop was an indicator of increased demand in the last week.
Oil prices plunged on Tuesday after OPEC downgraded its forecasts for oil demand in 2024 and 2025. The reason for this downgrade was the weak consumption in China, Which is a major consumer of oil. Therefore, if the economy is weak, global demand is negatively affected.
Furthermore, Trump has threatened to impose 60% tariffs on goods from China. Such an outcome would significantly hurt the already frail economy and further dim the outlook for oil demand.
