Crude oil dominated by USD ahead of supply data

The weaker manufacturing PMI data out of China was largely shrugged off this morning as crude prices advanced for a third consecutive session. Oil prices appeared to be moving in the opposite direction to the dollar which incidentally was also lower for a third day this morning. But in the afternoon trading, commodities turned mostly lower and once again the greenback was the culprit behind this latest move. The dollar found some support on the back of mostly stronger US economic data. New homes sales surged 8 per cent on an annualised format in February to its highest level in 7 years while the Flash Manufacturing PMI also topped expectations with a print of 55.3 which was the best reading since October. But the Richmond Manufacturing Index unexpectedly dropped to -8 this month, delivering a timely reminder about the recent downturn in US data. Earlier, both the headline and core CPI had printed +0.2% month-over-month in February which had given the dollar a short-lived boost. This quickly faded as investors released the 0% annualized inflation rate was nothing to get excited over. With the dollar being this volatile, oil and other buck-denominated commodities may also face similar price swings in the near term.

As well as a weaker dollar boosting oil prices recently, expectations of an imminent cut in US oil production are also growing after data from Baker Hughes on Friday showed rig counts fell for the fifteenth consecutive time last week. However there is now scope for some disappointment if this week’s supply data once again contradicts the rig count falls. The American Petroleum Institute’s (API) inventories data will be released tonight and the official numbers from the Energy Information Administration (EIA) will be out tomorrow. But it is worth pointing out also that despite the sharp increases in oil inventories recently, prices have not fallen as much as one would have expected them to. It could be that most of the negative news has already been priced in. Therefore any positive surprises may give traders the excuse to cut their bearish bets while some may even take advantage of these “cheap” oil prices and go long.

WTI has reluctantly been squeezing higher ever since the bears failed to hold their ground below the January low of $46.55 on Wednesday of last week. So far it is not clear whether this has been a false breakdown reversal pattern (bullish) or a bull trap (bearish). Unfortunately the answer to this statement will not be clear until WTI either takes out the prior high at $54.20 or drifts back below the $43.55 level. Thus, while US oil trades within this admittedly large range, traders should proceed with extra caution and be nimble. The next resistance level could be the 61.8% Fibonacci retracement at $49.55 while support is seen at $46.70 followed by $44.80. Meanwhile, Brent’s gains have so far been capped by the 38.2% Fibonacci retracement level of the most recent downswing at $56.50. If the buyers manage to take control of this level then Brent may make a move towards the next key resistance at $58.50 or even the 61.8% Fibonacci retracement at $59.00. The key support for Brent is at $53.50 followed by $52.00.

Figure 1:

Source: FOREX.com. Please note this product is not available to US clients

Figure 2:

Source: FOREX.com. Please note this product is not available to US clients