Oil hovers near 2-month low as weaker dollar helps stem deep losses

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By Ambar Warrick 

AiVIF.com-- Oil prices hovered near two-month lows on Thursday after easing concerns over Russian supply and a worsening economic outlook drove sharp losses this week, although weakness in the dollar on dovish signals from the Federal Reserve helped reduce some selling pressure. 

Crude markets plummeted on Wednesday after the Group of Seven nations, or G7, was seen imposing a much higher-than-expected price cap on Russian oil sales. The move saw traders greatly cutting expectations that a strict price cap would have forced Moscow to drastically cut oil production, in order to avoid selling at a loss. 

Weak economic data from the U.S., coupled with record-high COVID-19 infection rates in China also painted a dour picture for crude demand. U.S. business activity shrank further in November, preliminary data showed on Wednesday, as the economy faces growing headwinds from high interest rates and stubborn inflation.

Brent oil futures were flat around $85.33 a barrel, while West Texas Intermediate futures steadied at $77.94 a barrel by 21:43 ET (02:43 GMT). Both contracts plummeted over 4% on Wednesday, and settled at their weakest level since late-September. 

Low trading volumes, on account of the Thanksgiving holiday in the U.S. this week, also spurred big moves in crude markets.

But dovish signals from the Federal Reserve, which weighed on the dollar, helped oil markets stabilize after steep losses. Members of the central bank voiced increasing support for a slower pace of interest rate hikes in the coming months, the minutes of the Fed’s November meeting showed. 

The dollar tumbled 1% on Wednesday after the minutes, which eased some price pressure on commodities that are priced in the greenback. Growing expectations of a weaker dollar also benefits crude markets by supporting demand in countries that pay dollars for crude imports. 

Still, demand-side indicators for oil appear to be weakening. In addition to the weak business activity data, U.S. gasoline inventories- a key indicator of fuel demand at the pump- grew much more than expected last week. 

Overall U.S. crude inventories shrank by a bigger-than-expected margin during the past week, even as the government drew about 2 million barrels of oil from its Strategic Petroleum Reserve (SPR). The Biden administration also appears to be lowering the pace of its drawdowns from the SPR, which is at its lowest level since 1984. 

Focus now turns to a meeting of the Organization of Petroleum Exporting Countries next month, to see whether the cartel will announce more supply cuts to help support crude prices.