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Crude rally extends on weaker dollar, tightened supply outlook

Highlights

US Federal Reserve maintains dovish stance

Dollar tests one-month lows

Permian drilling rig count falls 6

Crude prices extended their rally July 29, settling higher on the back of a weaker US dollar and tightening inventories.

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NYMEX September WTI settled $1.23 higher at $73.62/b and ICE September Brent moved up $1.31 to $76.05/b.

Oil futures gleaned support from a weaker US dollar and rising risk appetite supported by a dovish tone taken by US Federal Reserve chairman Jerome Powell, analysts said.

"Oil prices are surging as risk appetite runs wild following disappointing economic data that solidifies the view that the Fed won't be slowing down its ultra-accommodative stance anytime soon," OANDA analysts said in a July 29 note.

"Strong earnings and a cautious US central bank bodes well for crude, which saw the rally slow heading into Fed day," they added. "The biggest downside risk to oil prices now is unsurprisingly the delta variant rapidly spreading and weighing on the economic recovery going into the end of the year."

NYMEX August RBOB settled 4.32 cents higher at $2.3514/gal and August ULSD climbed 3.34 cents to $2.1894/gal.

Powell, during a press conference following a July 28 Federal Open Markets Committee meeting, indicated the US economy had farther to go before easing the Fed's current supportive stance. The comments proved bearish for the US dollar, which in turn is supportive for crude prices.

The ICE US Dollar index fell to 91.86 in afternoon trading, on pace for the lowest close since June 25.

Powell's comments "juiced up the market by suggesting that there are no plans to raise interest rates anytime in the foreseeable future," Price Futures Group analyst Phil Flynn said in a note. "The Fed also acknowledged that there are upside risks to inflation and obviously if there is an upside risk to inflation that means there are upside risks to the price of oil and natural gas."

Meanwhile, US crude supply outlooks remain bullish following a 4.09 million-barrel inventory draw in the week ended July 23 and a decline in drilling activity.

The US oil and gas rig count fell five to 599 in the week ended July 28 led by a downturn in Permian drilling activity, rig data provider Enverus said July 29.

The slowdown in drilling activity was primarily seen in oil-focused plays, where rig counts fell 10 to 457. In contrast, the number of rigs primarily chasing gas climbed five to 142, the highest since the week ended March 18, 2020.

A six-rig slide in the Permian basin rig count comprised the bulk of the overall decline. It was the largest one-week drop in the Permian rig count since the week ended Aug. 5, 2020, when the basin shed seven rigs.

"Sentiment was buoyed by falling inventories across several markets and an easing of fears that the recent surge in COVID-19 cases would hurt demand," ANZ analysts said in a July 29 note.

"The falls suggest the rise in cases of COVID's delta variant is having little impact on mobility. While health authorities remained concerned about its spread, the high level of vaccination has prevented widespread restrictions," the ANZ analysts said in the note.

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