Oil futures declined on Friday, contributing to a loss for the week on concerns over prospects for demand and strength in the U.S. dollar pushed prices to their lowest since July.
“With equities retreating over the latter half of the week, a stronger dollar has also weighed on the crude complex,” said Robbie Fraser, senior commodity analyst at Schneider Electric. “Because oil is traded globally in U.S. dollars, oil and the dollar have a relatively strong inverse relationship. Prior to this week’s trading a weaker dollar had generally been supportive for crude futures.”
The dollar was up 0.4% in Friday dealings, as gauged by the ICE U.S. dollar index DXY, +0.53%, a measure of the buck’s strength against a half-dozen currencies. The greenback got a boost, in part, from better-than-expected monthly U.S. employment data, which revealed a drop to 8.4% in August unemployment rate, from 10.2%.
For oil, Wednesday stood out as “the biggest mover of the week with prices shedding more than 2%” for the session, said Fraser, in a daily report. “Those losses came amid continued concerns around demand weakness,” despite strong weekly declines in U.S. crude inventories and production reported by the Energy Information Administration.
West Texas Intermediate crude for October delivery CL.1, -3.45% CLV20, -3.45% fell $1.12, or 2.7%, to $40.25 a barrel on the New York Mercantile Exchange. Prices were poised for to settle at their lowest since late July.
November Brent BRN00, -3.13%, the global benchmark, was down $1.19, or 2.8%, at $42.88 a barrel on ICE Futures Europe, on pace for the lowest finish since mid-July.
WTI crude remained on track for a 6.4% weekly fall, which would end a four-week streak of gains, while Brent was heading for a 6.3% weekly decline.
Global demand, as well as a related rise in the supply of distillates has been a weight on prices.
“Refiners cannot produce gasoline without making other products like diesel, commonly known as distillates,” said Phil Flynn, market analyst at Price Futures Group, in a note. “The coronavirus pandemic slashed demand by one-third world-wide, and so far, the gasoline use has rebounded faster than that of distillates. Refiners still have big stockpiles of diesel and other fuels and do not want to make more of those products due to poor margins.”
Meanwhile, a fall in gasoline inventories also belies weak margins, analysts said.
Two months ago, gasoline supplies were 24 million barrels above seasonally normal levels. They‘ve since fallen at a “manic pace” five times faster than the July through August seasonal average of 5.3 million barrels, noted Michael Tran, analyst at RBC Capital, in a note, to stand at 7.4 million barrels higher than normal.
But U.S. mobility indicators suggest U.S. driving patterns have largely plateaued over the last six to eight weeks, he said, which means refinery cuts have been the main factor in the inventory decline.
“ In other words, it is a supply push rather than a demand pull. This is why gasoline refining margins are abysmal and weakening, despite inventories trending constructive since this reflects artificial tightness rather than an organic rebound in demand,” he said.
Tran argued that soft margins are likely to cap further crude rallies and that further cuts in refinery runs were likely in order to balance product stocks.
On Nymex, October gasoline RBV20, -3.61% was off 2.7% at $1.1719 a gallon, while October heating oil HOV20, -1.49% fell 0.7% to $1.1591 a gallon, with both contracts trading over 6% lower for the week.
In a report Friday, the EIA said that heading into the Labor Day weekend, U.S. gasoline prices the pump were at their lowest since 2004. The government agency pegged the U.S. average regular gasoline retail price as of the Monday before Labor Day weekend at $2.22 per gallon, the lowest level for this time of year since 2004.
Meanwhile, October natural gas NGV20, -1.72% declined 1.4% to $2.452 per million British thermal units, with prices looking at a weekly loss of around 7.7%.
Read:Natural-gas futures gain nearly 50% in August, but rally may be ‘short-lived’
Originally published on MarketWatch