Oil Closes Lower On U.S. Oversupply Fears

On Tuesday, oil closed lower as fears on U.S. oversupply will be too much for the global economy to handle. The dollar continuing to rise had also been a major burden on oil. What may turn things around would be the pledge by OPEC to possibly extend the output cut deal. WTI crude oil closed lower by 1.2% to $45.88 a barrel, while brent crude oil closed lower by 1% to $48.85 a barrel.

Increased Supply

The main reason why oil prices were pressured on Tuesday was because of an oversupply of oil in the United States. The Energy Information Administration — EIA — raised its forecast for the amount of oil to be produced in the United States. It now sees U.S. output coming in around 9.3 million barrels per day in 2017.

That number is expected to rise to 10 million barrels per day in 2018. Analysts are forecasting that oil stockpiles will decline by 1.8 million barrels for the week ending May 5. If this happens, it will be the fifth week in a row where stockpiles have dropped. That may seem very bullish, and in a way it is slightly.

That reason being is that despite oil stockpiles falling so many weeks, there is still an overabundance of supply. At the end of March, oil stockpiles hit an all time high of 535.5 million barrels. For traders to become bullish on the amount of oil stockpiles, they would have to drop by a larger amount.

Stronger Dollar

The dollar traded higher as traders looked to take on an improved risk appetite. The reason for traders looking for risk was because of the positive outcome from the French election. That was was where Emmanuel Macron was elected as the President of France. In addition, there was a large amount of optimism that the Fed might hike interest rates in June.

The dollar traded to a two-month high against the yen before closing lower. The USD/JPY pair traded to 114.25. How does a stronger dollar affect oil prices? The reason being is that when the dollar is higher, oil prices are reduced.

For starters, oil is denominated in terms of the U.S. dollar. With the dollar rising, it makes oil that much more expensive to buy. With that in mind, demand starts to drop off significantly.

Extended Deal

What has helped oil prices to head higher this year was the OPEC oil output cuts that were implemented in 2016. The goal was to have OPEC and non-OPEC nations come to an agreement to cut oil output in the first six months of 2017. Thus far, most nations have been sticking to the agreed upon output cuts.

The deal was made where there would be at least 1.8 million barrels of oil eliminated per day. The goal for the OPEC meeting at the end of this month was to extend the deal for an additional six months.The bullishness for Tuesday came about because of talk of possibly extending the deal beyond 2017. That means that the deal might be extended well into 2018, just to keep stockpiles low.

What Binary Options Traders Should Watch For

There are a few things that traders should watch.

The first of which is to see how the EIA forecast plays out. If the amount of barrels of oil in the U.S. start to rise, then oil prices will have a tough time trading higher. It would be prudent to track the next few EIA oil stockpile reports this month. That will likely show if oil stockpiles are still climbing or not.

The second item would be the stronger dollar. Oil, like most other commodities, trade opposite the dollar. That means when the dollar edges higher, commodities tend to trade down.

The final item that traders should keep an eye on would be to see if the output cut deal will be extended. Whether it is extended for six months or for well into 2018, it will still be highly bullish for oil prices. What would be detrimental to oil prices would be if the deal is not ultimately extended.