What does it mean for oil bears? In our opinion, nothing more than information that we can see one more upswing and a test of the 61.8% Fibonacci retracement and the previously-broken lower border of the blue rising trend channel, which is slightly above it. Such price action would be even in line with the commentary from our Tuesday’s alert.
Back then, we wrote that black gold remains below the previously-broken lower border of the black rising trend channel, which means that as long as there is no invalidation of the breakdown under this line all upswings will be nothing more than verifications of the earlier breakdown.
Additionally, when we look at the very short-term chart, the volume accompanying recent increases still raises some doubts about the strength of the demand side and increases the probability that reversal may be just around the corner.
Fundamental Factors and Black Gold
In our opinion, the pro-bearish scenario is also reinforced by the fundamental factors. Yesterday’s EIA data showed that the U.S. output remains above 10 million barrels per day, which keeps domestic production on track to meet the earlier estimate for an increase to 11 million barrels per day in late 2018. If American drillers will not let down, the U.S. will overtake Russia in crude oil production and become the largest global supplier. Such development will likely not please Saudi Arabia and may thwart OPEC efforts to reduce black gold’s stockpiles, increasing worries over another crude oil glut. In such an environment oil bulls could have problems keeping the price not only above $60, but also above the psychological barrier of $50.
Analyzing the current situation in the markets, we also came to the conclusion that the bulls will likely gain an additional enemy in the near future - the strengthening dollar.
As you know from our previous alerts higher values of the U.S. currency often weigh on prices of dollar-denominated commodities. For example, fuel imports for countries using other currencies become more expensive and potentially could even limit demand.
Taking the above ino account, we decided o take a closer look at the correlation between the black gold and the greenback.
Relationship Between Crude Oil and U.S. Dollar
Looking at the above chart, we see that higher values of the U.S. dollar do not always translate into lower prices of light crude. Such tendency we could see in the first half of 2017 and also between September and November (we marked them with grey). In the first of the above-mentioned periods the level of correlation dropped significantly, but it started to grow steadily in the second period, which resulted in a strong negative correlation in the following months.