The Dollar Is Thicker Than Oil

03/24/2020 10:54 am EST


Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The interplay between crude oil and the U.S. dollar is key, reports Phil Flynn.

Crude oil prices are starting to bottom despite the potential of the most significant supply glut in history. The reason is that the power of the U.S. dollar is supreme over the supply of oil. In other words, you cannot underestimate the power of the Federal Reserve's historic and unprecedented amount of stimulus to, at some point, create demand where now it is nonexistent. QE unlimited as the Fed announced that, "Previously, it had announced it would buy $500 billion worth of Treasury's and $200 billion in mortgage-backed securities.”

Rystad Energy reported that, on average, 76% of the world's oil storage capacity was already full, and current average filling rates indicated by balances were unsustainable. Although oil storage filling up and gas demand is parked, the market is starting to anticipate a Fed fueled oil demand surge in just a matter of months.

Feeding that optimism this morning are reports that deaths from the Coronavirus in hard-hit Italy are starting to fall. President Trump wants to get the economy up and running soon.  President Trump said the cure couldn't be worse than the disease. "Our country wasn't built to be shut down. This is not a country that was built for this.”

China has been on a massive oil buying spree buying oil at low prices and that is also lending support. Wuhan, the epicenter of the virus, is reopening for business. So, while the fundamental picture in real terms looks very bleak for oil, the charts are looking like its bottomed.

Massive stimulus and producers outside of OPEC will be forced to cut back supply. There is also speculation that the United States and Saudi Arabia may work together and conspire to prop up oil prices. U.S. Energy Secretary Dan Brouillette said that a U.S.-Saudi oil alliance was one option to stabilize prices as the COVID-19 pandemic continues to crush demand. This is key because the price war between Saudi Arabia and Russia shows no sign of ending.

Some Senators want to go further and go after Saudi Arabia and Russia and are calling for penalties for U.S. anti-dumping laws. In other words, fine them for targeting U.S. oil producers. Policymakers debate working with Saudi Arabia for market balance or pursuing sanctions against the OPEC kingpin for plans to ramp up its crude production significantly.

Still, gas prices hit some record-breaking lows. Bloomberg reported that Nymex gasoline futures settled at 41.18¢ a gallon, the lowest level since March 1999. The European gasoline benchmark fell more than 30% on Monday to the lowest since at least 2010, according to data compiled by Bloomberg. Nationally, retail gasoline is headed for lowest since 2004.

The front-month gasoline-RBOB futures contract on the New York Mercantile Exchange tumbled 21% to close at 49.47¢ per gallon. It earlier hit a record low of 37.80¢, or its lowest for a front-month contract of RBOB gasoline since futures of the energy product began trading on the New York Mercantile Exchange in 1984.

Washington cannot get its act together on a stimulus package.

So, predictions of zero price oil looks unlikely. The odds that a deal will get done with Congress as Americans are outraged by cheap, selfish politics. Do they have any shame? Trick question. Of course, they don't. They are politicians.

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn

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