US Crude Oil, US Dollar and Risk Trends Talking Points:
- The Market Perspective: Crude Oil Bullish above 76.00
- Risk appetite trends swelled this past session as Fed Chairman Jerome Powell signaled a slower clip of rate hikes was ahead – but how much did that translate into crude prices?
- A sharp 12.58 million barrel drop in US crude oil inventories last week – according to EIA – extends supply-driven pressure on this critical commodity
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Crude oil prices have extended their climb on the week to a third consecutive session, extending the rebound from a large technical level around 76.00 and pushing out the week’s performance to the most bullish showing (5.6 percent) since the beginning of October. On the fundamental side, we were offered up two contrasting foundations for support for the bulls: supply data out of the US and general sentiment thanks to key Fed speak. The timing of the energy market’s move suggests one of those features carried more weight in the performance thus far, but motivations can and do switch with time and circumstance. Before diving into the ‘reasoning’, the price action from the commodity itself carries weight on a large and scale. Looking at a week or monthly chart, the 61.8 percent Fibonacci retracement of the historical range – from the highs of July 2008 to the depths of the brief negative pricing in April of 2020 – lands just below 76.00. It is not clear how many traders would see this level, much less give it weight; but the more often it dithers around that level, the more recognition it will draw.
Chart of WTI Crude Oil Futures with Net Speculative Futures Positioning from COT (Weekly)
Chart Created on Tradingview Platform
It is notable that while US crude has worked on a loose range support – in just a double bottom – over these past two months, there is a divergence to be found in net speculative futures positioning from the COT. While it wasn’t a ‘V’ shaped reversal in net positioning (as seen above in blue), there has been a gradual recovery. That said, from where is the motivation for this move higher coming. The biggest development behind this market this past session was the general swell in sentiment seen across the range of ‘risk’ assets that were open and trading through the closing hours of the US session. That was in large part driven by the remarks from Fed Chairman Jerome Powell, who remarked that a slowdown in rate hikes was likely as soon as December. While that is not a surprise nor does it offer much tempering of recession risks, it nevertheless offered the kind of relief that equity traders seemed to be looking for – not to mention it pushed the Dollar lower. It would seem that this could have been a significant contribution to energy prices whether through a speculative appetite or through expectations for the ‘soft-ish’ landing that Powell still hoped for in his comments. The only problem is that the speculative correlation has deviated on the higher time frame (ie daily and weekly), but it was particularly off on the lower time frame (ie 15 minutes).
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Chart of WTI Crude Oil Futures Overlaid with the S&P 500 and Inverted DXY Dollar Index (Daily)
Chart Created on Tradingview Platform
In the absence of speculative motivation, traditional supply-demand functions are always worth monitoring. As it happens, the EIA’s inventory figures updated in the New York morning session. According to the agency, US stocks dropped by -12.58 million barrels – a dramatically greater draw than the -2.758 million expected and -3.369 million the previous week. That suggests a greater demand for processors and consumers which builds upon the reports that OPEC+ is considering cutting its own output due to the lower levels of global oil prices referenced over the weekend. This theme will continue to percolate in the background, but it doesn’t provide a tangible line of further scheduled events to keep this charge running. Moving forward, crude oil traders would do well to keep close tabs on the general ebb and flow of speculative appetite in the financial system to get a sense in this market.
Chart of US Crude Oil Inventories Overlaid on 5-Year Average (Daily)
Chart Created by the US Energy Information Administration
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