US oil ignores dollar strength, hits highest level in 7 months

The inverse correlation between the US dollar and oil seems to have been ignored in recent days. Although the dollar appreciated by more than 2.7% against a basket of currencies since the beginning of May, U.S. Oil rose by more than 7% in the same period to trade at a premium to Brent and at the highest levels seen since October last year.

Tuesday’s 2.5% surge in WTI came after American Petroleum Institute reported that US crude stocks had dropped by 5.1 million barrels for the week ending May 20, which was double the market expectations, suggesting that U.S. record built inventory is coming closer to an end.

Traders are probably awaiting confirmation from today’s Energy Information Administration official inventory numbers to support a break above $50 a barrel.

Unexpected disruption from big exporters such as Canada, Nigeria and Libya along with slowing output in Iraq all supported the bullish case, but whether prices can hold close or above $50 all depends on how fast output will recover in coming days.

However, with OPEC’s meeting just around the corner and the most likely outcome being that no agreement on freezing output will occur, this would limit further potential gains.

Surge in oil prices helped the Canadian dollar end a five days losing streak to recover slightly against the U.S. dollar. Canada’s central bank meets today and is expected to hold interest rates unchanged at 50 basis points, but traders will take their signals from the tone of the central bank.

Recent economic data does not seem compelling as employment, spending, housing activities, and manufacturing all deteriorated since the bank last met in April, meanwhile the wildfires in Alberta only adds salt to the wound. Economic growth will undoubtedly be revised for the second quarter, but it will remain to be seen if the central bank hints at further easing in coming meetings.

Albeit dropping slightly early on Wednesday, the dollar index continues to hold a near two-month high. New U.S. home sales which jumped 16.6% in April to the highest level since January 2008 provided further support for a Fed rate hike in the next two meetings. Markets are now pricing a 60% chance for rate increase in July and 37% in June; all that is required to trigger the rise is more positive economic momentum to move market expectations even higher and support further U.S. dollar strength.

Today’s Markit Services PMI could reinforce the perception of faster than anticipated U.S. recovery. Meanwhile Fed presidents Haker, Bullard and Powell are scheduled to speak in the next two days, but traders are more interested in what Chair Janet Yellen has to say on Friday.

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