The United States Oil Fund (NYSEArca: USO) recently dipped into a new bear market while the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), which tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, is gaining momentum.
In other words, it very could be the strengthening greenback that is the biggest near-term lid on oil prices. In addition to soaring against the British pound following last month’s surprising Brexit decision, the dollar looks poised for more upside against other major currencies, including the Japanese yen.[related_stories]
Some concerned oil market participants believe oil is rallying without strong fundamental cause. A case can be made that oil’s rally is defying still troubling supply dynamics and tepid demand.
Elevated levels of production remain an issue for oil as well. OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers.
Related: Are Dollar ETFs Ready to Rally?
“As the product glut reaches new heights and bearishness abounds, Chinese oil imports are showing significant signs of fatigue. Waterborne imports into China thus far in July are in line with the prior two months, and some 6.5 percent below the peak of import volumes seen in April,” according to OilPrice.com.
While the greenback has gotten a post-Brexit lift, the Federal Reserve’s impact on the greenback looms large. On Wednesday, Federal Open Market Committee (FOMC) meeting minutes revealed the Fed is concerned about the U.S. labor market. That is prompting some traders to think an interest rate hike this year is nearly out of the question, making the dollar’s recent rally all the more impressive.
Obviously, production is a key element in the decision-making process regarding energy investments. Currently, oil investors face conflicting reports regarding output. For example, Venezuela’s crude output is plunging to multi-year lows while Algeria is looking to boost production. Both countries are members of the Organization of Petroleum Exporting Countries (OPEC).
Related: A Very Bullish Call for Oil ETFs
“Crude stocks are just 20 million barrels shy of the 541 million barrels seen earlier in the year – itself the highest level in over 90 years. Meanwhile, gasoline inventories are at their highest level in at least 20 years, and edging higher at a time we should be seeing them drawn down by peak summer driving demand,” adds OilPrice.com.
For more information on the Oil ETFs, visit our Oil category.
PowerShares DB U.S. Dollar Index Bullish Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.