$55 Is the Make or Break Price for Crude Oil

The oil market has come a long way in the last 10 months, in fact, it has arguably gone too far. At least when compared to the fundamental backdrop. Not only has oil demand been slow to materialize in a post-Covid-19 environment, but the market is amply supplied. In late June, ending stocks of oil in the U.S. (excluding the SPR) reached an all-time high near 540,000 thousand barrels. Current storage is hovering in the high 480,000s. To put these figures into perspective, these are double the inventory levels seen in the heydays of oil. Chart Source: QST We have also noticed the U.S. oil rig count has rebounded modestly from summer lows. While U.S. shale drillers are still running much smaller operations than they were in early 2020 - about half - the increased activity will likely work in favor of inventory builds and against oil price appreciation. There will always be fundamental stories or explanations of commodity market movement, but we like to remind followers of the correlation the U.S. dollar has on other assets. Since mid-2020, the price of action in crude oil has been almost precisely the inverse of the U.S. dollar. Additionally, if you compare the two assets before the onset of the coronavirus, the relationship was similarly negatively correlated. Thus, the rally in oil starting in November can almost wholly be explained by weakness in the dollar. If currency market participants change their view on the greenback, as we expect, the oil market will likely be directly impacted. For instance, we suspect the dollar will head back to the mid-$90.00s. If so, the price of oil could reasonably make its way toward the low $40.00s. Chart Source: QST From a technical standpoint, the price of oil is nearing a significant pivot price at $55.00 per barrel. Precisely a year ago, oil at this level felt cheap but in 2021 it is likely expensive. Although the trend is clearly higher in oil, we are not sure the trend will survive a confluence of resistance posted by the original uptrend line dating back to 2016. Also, for much of 2019, the buyers stepped in each time oil dipped moderately below $55.00. This level that previously acted as support, will be resistance on the way up. Signs of an overheated rally will promote the idea of a reversal should the rally fail to break above the mid-$50.00s. For instance, on a weekly chart, the RSI (Relative Strength Index) is nearing $70.00 and the Slow Stochastics have entered overbought territory and appear to be trying to roll over. Of course, these factors alone do not guarantee the market weakens from here, but it does increase the odds of a fallout should something spook traders. After all, according to the COT report, large speculators are holding notable long positions, and this could signal most of their buying power has been deployed already and leaves prices vulnerable to a sharp correction. Chart Source: QST If we are wrong about the $55.00 area holding in oil, the next likely target would be the mid-$60.00s. Given the ample supply and sluggish demand (let us not forget international travel is still mostly squashed), it is difficult to imagine oil moving higher from here without significant help from further weakening in the greenback. We are in the lonely camp believing the dollar will move higher in the coming months, not lower. Get your popcorn, things are about to get interesting. Chart Source: QST *THERE IS A SUBSTANTIAL RISK OF FINANCIAL LOSS IN TRADING FUTURES AND OPTIONS.

$55 Is the Make or Break Price for Crude Oil

It's difficult to imagine oil moving higher from here without significant help from further weakening in the greenback.

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