USD: Oil price rebound continues ahead of US CPI report release

The main foreign exchange rates have remained stable during the Asian trading session with USD/CNY continuing to trade just below the 7.3000-level and USD/JPY at just below 147.50.

The verbal intervention from domestic policymakers in China and Japan to support their currencies has at least helped to stable their currencies close to recent lows although is unlikely to trigger a more sustained reversal of US dollar strength on its own. Market attention will shift back to the global inflation outlook today when the latest US CPI report for August will be released.

The recent rebound in the price of oil and gasoline has continued at the start of this week which if sustained would create a more challenging backdrop for central banks next year in their ongoing efforts to bring inflation back down to their targets.

The price of Brent crude oil rose further above USD92/barrel overnight extending its advance since the low last month to almost 13% and to almost 30% since the low from back in June.

The latest data published by OPEC showed that global markets face a supply shortfall of more than 3 million barrels a day in Q4. If realized it could be the biggest inventory drawdown since at least 2007 according to Bloomberg. OPEC’s 13 members have pumped an average of 27.4 million barrels per day so far this quarter or roughly 1.8 million less than it believes consumers needed. This gap between OPEC supply and demand is expected to almost double in Q4 when it estimates it will need to provide 30.7 million barrels a day to satisfy demand.

Saudi Arabia’s recent decision to extend production cuts until the end of this year means that OPEC supply is expected to remain stable. The developments are encouraging speculation that the price of oil could rise back above USD100/barrel by the end of this year. A negative development for global consumers and would limit room for central banks to reverse policy tightening in the year ahead.