Stock Build In Oil Causes Price To Fall

Oil closed lower on Wednesday after a surprise build in stockpiles caused worry amongst investors. The EIA had reported a larger than expected build in stockpiles, and as such indicates that demand has gone down. Before the price drop in oil, it had surged as much as 11% during the month of August. The reason for this was talk from OPEC and other non-OPEC members alike attempting curb the production of oil through an oil freeze. The dollar heading higher spooked oil traders as well, as talks came out from the Fed that a potential rate hike may be on the table. WTI Crude oil closed lower by 3.56% to $44.70 a barrel, and Brent Crude fell by 2.75% to $47.04 a barrel.

Too Much Supply

There are a few factors for dictating the price of oil, but one of the main ones has to do with a surprise build in stockpiles. The Energy Information Administration — EIA — noted that crude stockpiles had increased by a build of 2.3 million barrelsfor the latest week. This was a big shock for the oil market, and the price action for the day can be explained with three major problems. The first problem is that analysts had anticipated a build of only 921,000 barrels. Considering that the final build amount reported is roughly double the amount to what analysts had expected is not bullish for the price of oil in the least. The second problem is that this is the second straight week where there has been a build in stockpiles. While this doesn’t guarantee that the following report will follow a similar outcome, it does signify that a very bad trend might be on the way. The final problem is that another build in stockpiles doesn’t bode well for the global market, which is already stuck with an oil glut dilemma. The goal of all nations should be to reduce the amount of supply in order to stabilize the price.

OPEC Effect

The Organization of Petroleum Exporting Countries — OPEC — had announced at the beginning of August that there would be an oil meeting held in September. This oil meeting is being done to discuss the possibility of having both OPEC and non-OPEC countries alike agree to an oil freeze. Oil had gained 11% since this meeting had first been announced, but has quickly fallen hitting its 2-week low on Wednesday. The reason for the drop could be because of skepticism. That is skepticism that a deal could get done to where all nations would agree to curb their output. All countries need to agree to such a deal, because a reduction of supply could theoretically lift the price of oil.

Fed Territory

No matter how you look at it the Fed is an important piece of the puzzle for the oil trade. The Fed hinted at a possible rate hike next month in September at the most recent meeting in Jackson Hole. Think about the implication of this for a second. Even if an oil freeze is achieved by OPEC, a Fed rate hike could still squash any gains in oil. Whether or not the Fed decides to hike rates will be dependent upon the jobs report set to be reported this coming Friday. What makes oil so reliant is not the Fed itself, rather the effect it will have on the U.S. dollar.

Dollar Higher

With the possibility of a rate hike mentioned at the Jackson Hole meeting, it has led the dollar higher.The USD/JPY pairtraded higher to $103.44, marking a stronger dollar. The reason for this is because if the Fed hikes rates, it will cause the value of the dollar to go higher. When rates are brought up, it boosts the amount of savings people can earn. This is why the dollar goes higher when the Fed hikes rates. This is especially true in the face of other countries that have enacted negative interest rates. Such countries actually lose money in their savings accounts, and are forced to spend it. Where exactly does oil fit into all of this? Well, with oil being denominated in terms of the U.S. dollar its value drops. Thus, the reason why oil has been falling since Yellen’s speech. There is that expectation that the Fed may hike interest rates. On top of that, the dollar becomes a more attractive investment. Traders dump their position in oil, and put themselves into the dollar trade. It is imperative that the Fed refrain from hiking rates, otherwise the price of oil may head lower in the coming months. Historically, September is usually a bad month for the price of oil anyways. Adding pressure from a stronger dollar, and a fallout from the OPEC deal would not be bullish for the price in any sense.