WTI intermarket: stocks down, risk off, too much production

WTI has dropped along with the dollar and stocks. WTI fell from $50.35 down to $48.60 and there have been a number of factors at play behind the scenes.

• CIA agrees North Korea can fit nuclear weapon on missile - NBC
• US: PPI for final demand falls 0.1% in July; services decrease 0.2%, goods decline 0.1%

Markets are in mild risk aversion in the case of N.Korea, although the sounds of the drums of war are usually positive for oil. However, geopolitical tensions around the world could be a double-edged sword for oil prices. You could bend either bullish or bearish depending because it matters on where the wars take place around the world and what countries are involved. A complicated scenario such as N.Korea, or say, Syria, could threaten the complicated alliance among the world's biggest producers.

Usually, the dollar and oil are negatively correlated, but we have seen a drop in the DXY to 93.43 on the back of the PPI numbers, yet oil has followed suit. The S&P 500 is down over 30 points to 2443 and the other benchmarks have followed a similar fate which is also hurting the dollar. Fed's Dudley has been making comments around inflation and his mixed message has got the market in a panic that the inflation target of 2% will not be met in the medium term. This is also oil bearish and on an intermarket basis, WTI and stocks tend to correlate. However, the correlations between WTI and the S&P 500 for example, have not been solid of this year, especially through the month of May when WTI dropped hard and stocks continued to print fresh record highs within the steep bullish trend.

• Fed's Dudley: Modest wage growth reflects sluggish productivity
• Rates: US-North Korea tensions are driving the markets - Rabobank

Meanwhile, the inventory data today was bullish for oil, but it failed to close above the $50 handle in WTI and a subsequent monthly report from OPEC showed that crude production among the group’s members rose in July, which helped the bears along and sparked off the downside. OPEC has lifted its forecast for global oil demand growth this year by 100,000 barrels a day. OPEC now expects growth of 1.37 million barrels a day in 2017.  However, the key announcement was that production from the group rose further in July, driven by higher production in Libya, Nigeria and Saudi Arabia.

WTI levels

Eyes are now on 48.50 support before 47.70/80, 47.20 and 45.50 on the wide. To the upside, the 50 handle was key and it just goes to show that if oil can't rally and hold a bid above there on the bullish EIA data, traders are simply not convinced that demand is strong enough to satisfy the supply.