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US Oil Production Falls, Dollar Continues to Weaken

A series of back to back news releases pushed the US dollar significantly lower this week and helped sustain higher prices for crude oil and its products. On Wednesday morning, China released statements saying they may slow or halt the purchase of US treasuries. The announcement comes on the back of increased trade tensions between the US and China, which has sparked concern that China’s US treasury holdings could be used as financial leverage for future negotiations. China stated that US treasury investments have become less attractive compared to other global opportunities. In the wake of the announcement, the US Dollar Index sold off hard from around $92.40 to as low as $91.92. On Thursday morning, the European Central Bank hinted that it would be ending its $2.3 trillion-euro stimulus plan sooner than expected as the discussion surrounding the Eurozone’s economy shifts from recovery to expansion. The US Dollar Index quickly gave up all overnight gains and consolidated below earlier lows of $91.92. The next day, another round a bearish US Dollar news broke as Germany’s Angela Merkel struck a deal with Social Democrats to open coalition talks concerning the formation of a new German government. The announcement pushed the US Dollar lower as capital flowed into the Euro, British Pound, and Swiss Franc. All-in-all the US Dollar Index has fallen heavily from intraday highs near $92.40 on Wednesday to lows near $91.20.

US Dollar Index, Source: Tradingview.com

The Weaker dollar offered additional support to the energy complex in conjunction with a decline in US production estimates as reported by the EIA in their Weekly Petroleum Status Report for the week ending 1/5/2018. US crude oil production as estimated by crude oil refinery inputs fell roughly 285,000 barrels per day to 17.3 million barrels per day. Gasoline production fell to 9.5 million from 9.7 million and distillate fuel oil production fell to 5.3 million from 5.6 million. On the demand side, aggregate demand, as estimated by total products supplied, rose 5.6% to 20.6 million barrels per day. Motor gasoline demand rose 2.5% to 9.1 million barrels per day and distillate fuel oil demand rose 6.8% to 3.9 million barrels per day. US crude oil inventories excluding the Strategic Petroleum Reserve decreased by 4.9 million barrels. Motor gasoline and distillate fuel oil inventories increased by 4.1 and 4.3 million, respectively. In total, the EIA WPSR showed a decrease in aggregate supply and an increase in aggregate demand, which has been reflected in price.

WTI futures started the week strong on Monday with price action pushing above highs made the previous Thursday as the market speculated on a decrease in inventories brought about the prior winter storm. API inventory estimates released Tuesday evening confirmed the market’s expectations with a crude oil draw over -11 million. The next three days offered continual bullish support for WTI as the dollar sold off heavily following news out of China and Europe. ULSD futures posted a substantial rally from Sunday lows, but showed an overall weaker performance than WTI. Prompt month ULSD futures climbed as high as $2.0997 from lows near $2.04, but was unable to maintain price action above resistance at $2.09 that was formed on January 1st and 3rd.

WTI Futures, Source: Tradingview.com
ULSD Futuers, Source: Tradingview.com