Market Update: Crude Chart

Market Update: Crude Chart

1 June 2016, 15:45
Roberto Jacobs
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Market Update: Crude Chart


Here’s a 4-hour chart for Brent (UK) crude oil:

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The chart shows how significant the area around $48 has been over the past month. It acted as resistance at the end of April and earlier this month, then as support over the last week. In fact, if one looks at a daily chart it shows that the front-month Brent contract last closed below $48 on 13th May. 
 
Interestingly, the US dollar has strengthened over this period as well. The EURUSD broke below 1.1400 on 12th May and is now trading around 1.1170 while the Dollar Index broke above resistance around 94.00 on the same day and is currently hovering around 95.50.

 
EURUSD – 4-hour chart:

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Oil is (mostly) a dollar-denominated commodity. Consequently, it becomes more expensive for other currency holders to buy as the dollar rises in value. After all, they have to buy dollars first before they can purchase dollar-denominated assets. That means we should generally expect oil to fall when the dollar rises. However, while there is a strong negative correlation between the dollar and oil over the medium to long-term, short-term moves are less coordinated. Certainly, the trading relationship between the dollar and oil is nothing like the one we can currently observe with gold.
 
For now the oil price is shrugging off the ongoing dollar rally. But will it be able to do so if the greenback continues to strengthen? This is a particular interest as the dollar is getting support now that the odds have been slashed on the likelihood of a summer rate hike. This followed last week’s release of minutes from the FOMC’s April meeting along with a pile of hawkish comments from Federal Reserve members. It will be interesting to see if fed chairman Janet Yellen is similarly hawkish during her speech this Friday.
 
Of course, one of the main drivers for the rally in crude has been the outlook for supply and demand. Analysts now expect rebalancing to take place much sooner than was estimated earlier this year. We’ve had a number of supply disruptions recently (the Canadian wildfires, the political crisis in Venezuela and hostilities in Nigeria and Libya) and some bigger-than-expected drawdowns in US inventories. This further dims the prospect (if any really existed) of OPEC agreeing to an output freeze when it meets next week. Iran and Iraq continue to increase production and Saudi Arabia is still determined to increase its market share. However, the outlook for demand growth is cloudy, particularly given uncertainties over China’s economic outlook.
 
David: For now the oil price is shrugging off the ongoing dollar rally. But will it be able to do so if the greenback continues to strengthen?


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