Crude rises as investors buy the dip amid weak US dollar

Crude oil futures rebounded in midafternoon Asian trade Oct. 5 after regional investors bought the dip following an overnight selloff, though market observers continued to warn of potential downside risk as elevated crude prices begin to lead to demand destruction.

At 3:01 pm Singapore time (0701 GMT), the ICE December Brent futures contract was up 61 cents/b (0.71%) from the previous close at $86.42/b, while the NYMEX November light sweet crude contract rose 54 cents/b (0.64%) at $84.76/b.

The recovery followed a near 6% slump in the previous session after weaker-than-anticipated jobs market data fueled recession fears among investors.

However, prices found a floor in the Asian session on hopes that the pullback in crude would ease inflationary pressures globally.

"The oil plunge provided markets with a reprieve by easing inflationary concerns," said CMC Markets' Market Analyst, Tina Teng, in an Oct. 5 note, adding that a weakening jobs market may promote the US Federal Reserve to moderate its hawkish stance on rate hikes.

The official US Non-Farm Payroll report due later Oct. 6 is expected to provide a more definitive insight into the future direction of the Fed's interest rate policies and its impact on economic growth and crude demand.

The report is expected to show an additional 165,000 to 175,000 jobs in September, though slowing down from the previous month's figure of 187,000, reflecting a slowdown in growth and lifting hopes of more dovish monetary policy.

"Given the current emphasis on interest rates, the report's findings will likely significantly influence the Fed's response and impact financial markets," Stephen Innes, SPI Asset Management's Managing Partner said Oct. 5.

Following the easing of hawkish expectations, the safe haven US dollar lost some ground through Asian trade.

The ICE US Dollar Index was at 103.365 as of 0602 GMT Oct. 5, down 0.15% from the previous close. A weaker dollar results in dollar-denominated assets like oil futures becoming less expensive to investors holding foreign currencies, thus boosting demand for these assets.

Furthermore, prices were boosted by a counter-seasonal US crude inventory draw that extended in the week to Sept. 29, latest data from the Energy Information Administration showed.

US commercial crude oil stocks declined 2.22 million barrels in the week ended Sept. 29, the EIA reported, falling to a fresh nine-month low of 414.06 million barrels.

Distillate inventories fell by 1.3 million barrels to 118.8 million barrels, the EIA data showed.

However, gasoline inventories rose to six-month highs over the same period, climbing 6.48 million barrels to 226.98 million barrels, reflecting a steep slowdown in demand.

The build comes as product supplied for gasoline, the EIA's proxy for demand, plunged 7% on the week to 8.01 million b/d.

High retail gasoline prices appear to be trimming gasoline consumption and moderating crude demand stateside. Nationwide gasoline prices hovered around $3.83/gal in the week to Sept. 29, according to AAA data, up round 20 cents from the month prior and nearly 25 cents higher than year-ago levels.

"Demand destruction always plays a crucial role in eventually easing price pressures," said SPI's Innes, noting that the latest gasoline build suggested that demand fell to the second-lowest level of the year.