Oil falls on stronger dollar as markets in Europe trade down

VIX rises to four-month high amid Evergrande uncertainty

Oil fell by as much as $1 per barrel on Monday as markets traded down in both Asia and Europe and the dollar strengthened. 

Dollar strenghtens

Growing uncertainty as to the strength of the post-Covid recovery and the prospect of the Federal Reserve tapering the substantial bond-buying programme that has bolstered the US and global economy drove the dollar higher. 

While by no means immune from substantial devaluation, the dollar, as the world’s reserve currency, acts as a safe haven for those looking to avoid or escape more uncertain markets. 

Although down by 0.3% against the yen, a stronger safe-haven, the dollar traded up by 0.1% and 0.5% against the euro and dollar, respectively. In addition to Covid-19, markets are also jittery because of the ongoing liquidity crisis engulfing Evergrande Group, one of China’s largest property developers. 

The anxiety induced by the possible collapse could be detected beyond Asia. By 15:55 BST (UTC+1), the pan-European Euro Stoxx 50 traded down by 2%. 

By 09:55 (EST), the S&P 500 stood 1.3% lower, while CBOE’s Volatility Index (VIX) had jumped by 22.6% to 25.38 its highest level in four months. 

Gulf recovery

In addition to a stronger dollar making dollar-priced oil more expensive for those with other currencies leading to risk aversion, oil also dipped as operations in the Gulf of Mexico continued to normalise.

The key producing region had been battered in recent by a slew of weather events, with Hurricane Ida and Hurricane Nicholas causing the most disruption. 

Fear that the area could take some time to recover and to resume their activity drove oil prices higher in the immediate aftermath. Indeed, Monday saw Shell announce that its West Delta-143 transfer facility would remain closed for the rest of 2021 as a result of the damage inflicted by Ida. 

In the wider picture, however, the industry has bounced back relatively quickly. According to the most recent update from the Bureau of Safety and Environmental Enforcement, only 7.3% of manned platforms in the Gulf remain evacuated, with almost 77% of oil production and 66% of gas production back online. 

This recovery in supply has contributed to oil’s price correction. Spot Brent crude traded down by 1.1% at $73.95 per barrel, while US Crude spot stood 1.4% lower at $70.87 per barrel. 

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