Commodities Round-up: Stronger dollar, US inventory data clobber oil futures

Oil futures retreated on Wednesday (31 August) as the dollar strengthened and a US report pointed to a higher than expected rise in crude stockpiles stateside.

Data for the prior week published by US Energy Information Administration pointed to a rise of 2.3m barrels, against market expectations of a 700,000 to 825,000 barrel rise. All the while, the strength of dollar dogged commodities in general, especially oil and gold, for much of the European session.

At 5.01pm BST, the Brent front month futures contract was down 2.63% or $1.27 to $47.10 per barrel, while the West Texas Intermediate was 3.09% or $1.43 lower to $44.92 per barrel, as the Saudis attempted to reassure the market on supply and demand permutations.

In an interview with Al-Arabiya TV, Saudi oil minister Khalid Al-Falih said: "The oil market is now saturated with stored crude at beyond usual levels and we don't see, in the near future, a need for the kingdom [of Saudi Arabia] to reach its maximum capacity".

According to the International Energy Agency, Saudi Arabia is capable of producing 12.5m barrels per day (bpd), but is currently pumping in excess of 10.6m bpd – which is still a record high.

Fawad Razaqzada, market analyst at Forex.com, noted that should the short-term fluctuations in oil prices due to the movements in the dollar be ignored, the fundamentals from an actual oil supply and demand point of view become a lot clearer.

"On this front, little progress has been made. Clearly, many speculators are now just waiting to find out whether Saudi Arabia and other members of the Opec will agree next month to a production freeze deal with some non-Opec producers, led by Russia. Both Iran and Iraq have come out in recent days, stating that that they support the idea of an output freeze as long as it doesn't impact their own pursuit of market share.

"If these important Opec members go into the meeting with that sort of mentality, I would be very surprised to see any sort of agreement being achieved. So the potential is there for a sharp oil price drop in this scenario."

Away from the crude market, precious metals were also dragged lower by the strength of the dollar, as the US Consumer Confidence Index (CCI) for August lurched to its highest level in almost a year at 101.1, consequently reinforcing expectations of the Federal Reserve raising interest rates in 2016.

At 5:18pm BST, Comex gold for December delivery was down 0.30% or $3.90 at $1,312.60 an ounce, while spot platinum was 0.47% or $4.93 lower at $1,052.17 an ounce. However, early hedging calls by traders ensured Comex silver futures bucked the wider precious markets trend, posting a rise of 0.57% or 11 cents to $18.78 an ounce.

FXTM research analyst Lukman Otunuga said the precious metals market saw dollar bulls receive plenty of encouragement. "For an extended period, economic data from the US has repeatedly exceeded targets while the slightly easing concerns over the unstable global landscape continue to provide leeway for the Fed to take action.

"Clarity and direction on US rate hike timings were gifted to investors following [Fed Chair] Janet Yellen's recent hawkish comments and it has now become a matter of when rather than if rates will be increased."