Oil continues to drop as strong dollar pressures commodities markets

Oil Prices Dip as Strong Dollar and Interest Rate Concerns Weigh

Oil prices experienced a decline in early Asian trade on Monday, marking a second consecutive session of losses. The dip is largely attributed to a strengthening dollar and renewed fears of protracted high interest rates, which tempered investors' risk appetite.

Brent crude futures decreased by 40 cents, or 0.5%, to $84.84 a barrel as of 0036 GMT, following a 0.6% drop in the previous session on Friday. Similarly, U.S. West Texas Intermediate (WTI) crude futures fell by 39 cents, or 0.5%, settling at $80.34 a barrel.

Factors Influencing Market Sentiment

Tony Sycamore, a market analyst based in Sydney, noted, "The U.S. dollar opened strong this morning, breaking higher thanks to better-than-expected U.S. PMI data on Friday night and political concerns ahead of the French election." A robust dollar typically makes dollar-denominated commodities less appealing to holders of other currencies, thereby exerting downward pressure on oil prices.

Notwithstanding the recent dip, both major crude benchmarks posted approximately 3% gains the previous week. This uptick was driven by signs of increased demand for oil products in the U.S., the world’s largest consumer, and OPEC+'s ongoing production cuts, which have kept supply constrained.

Demand and Supply Dynamics

A recent note from ANZ analysts highlighted that U.S. crude inventories experienced a decline, while gasoline demand rose for the seventh consecutive week. Moreover, jet fuel consumption has rebounded to levels last seen in 2019, further supporting the market.

Geopolitical tensions are also playing a role in underpinning oil prices. The ongoing Gaza crisis and increased Ukrainian drone attacks on Russian refineries add layers of risk to the global oil supply chain.

Regional and Domestic Developments

In Ecuador, state oil company Petroecuador declared force majeure on deliveries of Napo heavy crude for export. This action followed the shutdown of a crucial pipeline and oil wells due to severe weather conditions, complicating the country's oil supply capabilities.

In the United States, the number of operational oil rigs fell by three to 485 last week, hitting their lowest point since January 2022, according to data from Baker Hughes. This reduction in operational rigs could signal a tightening of future oil supplies.

As the market continues to navigate these multifaceted influences, the interplay between geopolitical tensions, operational capacities, and macroeconomic indicators will likely keep oil prices in flux in the near term.