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.