Oil Market: Is the U.S. Dollar Leading the Way?

In the last couple of weeks, we have been analyzing various scenarios and factors that could impact crude oil prices.

 

We emphasized the crucial support level at 100 for the U.S Dollar Index. A breach of this level would indicate a bearish trend. Historically, such a development has been bullish for oil, as both WTI and Brent, quoted in US dollars, tend to exhibit a strong inverse correlation with the $DXY.

 

Beginning this year, and for the first time since January 2023, the 50 EMA has crossed below the 200 EMA, signaling a reversal in the trend for the Index. It is possible that the market, and I share this perspective, is anticipating or pricing in an aggressive shift in monetary policy by the Federal Reserve. This view is supported by open interest data which indicates that speculators have established a significant short U.S. dollar position (-66.8), the largest since the beginning of 2020.

 

Furthermore, there is a growing belief in the market that a rate cut is anticipated at every Federal Reserve meeting throughout 2024, from the March meeting to the latest one in December of this year.

 

Currently, oil appears to be range-bound in the low to high $70s per barrel. However, considering seasonal factors and overall inventory levels, oil seems undervalued. As these multiple factors align, we anticipate the potential development of an uptrend. We should watch closely for a weaker dollar, which could catalyze a new bullish move in the oil market.

 

By Miguel E. Andujar