Oil tests support as US Dollar strength snaps August rally

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• Oil (WTI) slides lower and starts flirting with first important support near $88. 
• The US Dollar value keeps increasing as markets price in a  possible persistent rate differential between USD and  other  currencies.
• Higher Oil prices have negative implications even  for Oil producers.

Oil prices drop for a second day in a row, with US Western Texas Intermediate (WTI) breaking below the $90 level, on the back of a strengthening US Dollar.  Although higher Oil prices should be a good thing for Oil-producing companies, the recent spike has triggered a 5.3% sell-off in an oil producers index. It looks like energy traders are reaching the pain point where demand could start to diminish, which means less  income for oil producers. 

Meanwhile, the US Dollar (USD)  is crushing the markets again. The US Dollar Index (DXY), which tracks the USD against a basket of other main currencies, trades above 106.00, whereas the EUR/USD pair breaks lower to 1.05.  It looks like a stronger US Dollar is here to stay as it benefits from the so-called rate differential story, or the fact that the US Federal Reserve (Fed) is expected to keep interest rates at a higher level than other central banks. This strengthens the Dollar as it attracts more foreign capital inflows.This sentiment has triggered a flight to safety across the board as higher interest rates for a longer period could mean a recession and therefore lower demand for Oil.

Crude Oil (WTI) price trades at $88.47 per barrel, and Brent Oil trades at $91.16 per barrel at the time of writing. 

Oil news and market movers

• The upcoming weekly Crude stockpile report from the Energy Information Administration (EIA) could see a jump in crude price should the Cushing strategic stockpile print another new low. So far, for the third quarter, stockpile is down 45%.
• Recent reports show Russia is still relying on European demand for Oil. Over half of the exported Russian crude makes its way to Europe despite the price cap breach. 
• The CEO of Continental Resources Doug Lawler asked the US government to explore more in domestic crude production. Otherwise, WTI Crude could be heading to $150 if the current pace of drawdowns in stockpiles is maintained throughout the rest of 2023, he said.
• The global decline in equity markets and concerns on the healthiness of the US consumer might trigger a step back in demand for Oil.
• Similar issues from China, where real estate conglomerate Evergrande missed interest payments on its debt.. 
• The stronger US Dollar backed by the steady-for-longer elevated rate stance of the Fed could act as a cap on demand globally for Oil. 

Oil Technical Analysis: small bounce off support

Oil prices are heading into a small correction phase, which is more than granted after the fierce rally since the end of August. The Relative Strength Index (RSI) is still very elevated and any cooldown is more than welcomed from a technical perspective, as crude Oil was trading in an overbought situation. Expect to see pressure built on several lower pivotal levels, which should be able to provide ample support and underpin prices. 

On the upside, the double top from October and November of last year at $93.12 remains the level to beat. Although this looks very much in reach, markets have already priced in a lot of possible supply deficits and a bullish outlook. Should $93.12 be taken out, look for $97.11, the high of August 2022.

On the downside, a new floor is formed near $88 with the high of September 5 and 11 underpinning the current price action. Proof of that already exists with the dip of September 13 and September 21, which reversed ahead of $88. Should $88 break , the peak of August 10 needs to be enough to catch the dip near $84.20. 

WTI US OIL daily chart