WTI Crude Oil Prices Tumble as Dollar Bulls Make Big Bets on Fed Dot Plots

Witawat (Ed) Wijaranakula, Ph.D.
Thu Dec 17, 2015

The WTI crude oil futures contracts January’16 [CL1.NYM], which are traded inversely correlated to the U.S. dollar, tumbled 2.51% to an intraday low of $34.63 a barrel on Thursday, following a 1.45% surge in the U.S. dollar index (DXY), a weighted index of the value of the U.S. dollar relative to a basket of six major currencies. According to Bloomberg, Citigroup and BNP Paribas SA came out on Thursday and defended their dollar positions and said that the U.S. Federal Reserve will hike interest rates further next year, which fueled the U.S. dollar rally. Dollar bulls are betting big on the Federal Reserve’s so-called dot plot, as the Fed expects the fed funds rate to rise to 1.375% by the end of 2016, meaning at least four more quarter-point rate hikes next year.

At the press conference after the Federal Open Market Committee (FOMC) meeting on Wednesday, Fed Chair Janet Yellen made it clear that the pace of increases will be gradual and dependent on the quality of economic data. Although the Fed’s objectives are maximum employment and a 2% inflation target based upon core personal consumption expenditures (PCE), the Fed expects core PCE inflation to reach 1.6% in 2016 and 1.9% in 2017. 

According to the U.S. Department of Labor, the latest reading of the core PCE for October was 1.28% year-on-year. Thus, the Fed may have to sit and wait for a while until inflation gets to their target level, especially when the crude oil price is tumbling. Yellen thinks that the crude oil price will find the bottom sometime and the inflation will start rising. That is what she hopes.

The crude price has been on a wild ride since earlier this week, as it hit an intraday low of $34.53 a barrel on Monday, the lowest level in six years, as concerns about oversupply persist. The U.S. is also on the verge of lifting the 40-year oil export ban, included in the $1.1 trillion spending deal agreed to in Congress on Tuesday evening. Abdalla El-Badri, secretary-general of the Organization of Petroleum Exporting Countries (OPEC), said on Tuesday that, “The net effect of export of American oil on the market is zero,”.

It could be the beginning of the end for higher oil prices though, as U.S. shale oil production will jump as soon as the crude price climbs. The U.S. is the third-biggest oil producer and produces 9.176 million barrels per day (bpd), according to the U.S. Energy Information Administration (EIA).

The spot WTI crude oil price tumbled 3.95% to an intraday low of $35.29 a barrel on Wednesday, after the EIA reported that U.S. commercial crude oil inventories rose to 490.7 million barrels, up 4.8 million barrels in the week ending December 11, compared to the analysts’ expectations of an inventory decline of 2.5 million barrels. The EIA said stockpiles at Cushing, Oklahoma, the delivery point for WTI futures and the biggest U.S. oil-storage hub for WTI futures, rose by 607K barrels to 60.056 million barrels, approaching the April 17 peak level of 62.2 million barrels. Total storage capacity for the site was 71.4 million barrels as of March 31, according to the EIA.

Excluding the Strategic Petroleum Reserve (SPR) of about 695.1 million barrels, U.S. crude oil inventories remain near the peak level of 490.9 million barrels set in the week ending April 24, 2015. On Tuesday, the American Petroleum Institute (API), an industry group that represents about 400 oil and natural gas corporations, said its crude oil inventory data for the week ending December 11 showed a rise of 2.3 million barrels.

As of December 8, there are 253,141 long positions of light sweet crude oil futures, traded on the New York Mercantile Exchange (NYSE) by managed money or hedge funds, an increase of 2,084 long positions from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). This is compared to about 178,888 short positions, an increase of 7,083 short positions from the previous week where light sweet crude oil contracts are traded in units of 1,000 barrels. Hedge funds continued to increase their net short positions by about 4,999 contracts, as they are betting that the crude oil price could go lower.

From our technical viewpoint, the crude oil price just bounced off the trendline support of the descending (DES) wedge chart pattern at $34.53 a barrel, as its downtrend continues in a bearish lower low chart pattern, meaning every low (L) is lower than the previous low. If the trendline support can’t hold, the crude price could drop to $33.55 a barrel, or the February 12, 2009 low. In order to establish an uptrend, the crude oil price needs to break out and stay above the October high of $50.92 per barrel level. There are walls of resistances between the current price and that October high, though.

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