Crude Oil Hammered by Strong Dollar, Bearish Head and Shoulders Pattern Emerges

Witawat (Ed) Wijaranakula, Ph.D.
Fri Nov 6, 2015

The U.S. dollar index (DXY), a weighted geometric index of the value of the U.S. dollar relative to a basket of six major currencies, surged 1.45% to an intraday high of 99.47 on Friday, after the U.S. Labor Department released the nonfarm payrolls report for October showing 271,000 jobs were added to the economy in September while the unemployment rate dipped to 5.0%, from 5.1% in September. The jobs report came in well above Wall Street economists' expectations of 180,000. The August and September figures were revised by a combined 12,000 more than previously reported. 

The spot WTI crude oil price, traded inversely with the U.S. dollar, tumbled 2.84% to an intraday low of $44.11 per barrel on Friday before bouncing back to close at $44.29 per barrel, the third straight day of declines. More selling pressure on the price of crude oil came on Friday after U.S. President Barack Obama rejected the proposed Keystone XL pipeline, which runs from the Western Canadian Sedimentary Basin in Alberta to refineries in Illinois and Texas. The pipeline could potentially have been used for storage of millions of barrels of oil, adding to the current glut in inventory.

The U.S. Energy Information Administration (EIA) said on Wednesday that U.S. commercial crude-oil inventories rose to 482.81 million barrels, up 2.85 million barrels in the week ending October 30. Analysts had expected an inventory build of 2.5 million barrels. 

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. The U.S. consumes an average of 19.11 barrels per day (bpd) and produces about 9.14 million bpd. As part of the proposed budget deal reached by the U.S. Congress and the White House on October 26, the federal government could start selling off about 8% of the SPR, or about 58 million barrels of crude between 2018 and 2025.

Russia and Saudi Arabia, the world’s two biggest oil producers, indicated last month that they weren’t pulling back their huge crude output levels any time soon. According to The Wall Street Journal, Russia produced oil in September at levels not seen since the fall of the Soviet Union, pumping an average of 10.74 million bpd, up 0.4% from August.

The Saudis have ramped up production above 10 million bpd for the past few months. Saudi Arabia told OPEC that its June production of 10.564 million bpd was a record, exceeding a previous all-time high set in 1980. Bloomberg reported that Saudi Arabia’s commercial petroleum stockpiles increased to 320 million barrels, the highest since at least 2002, from 319.5 million barrels in June, according to data on the Riyadh-based Joint Organisations Data Initiative's website in late September. 

As of October 27, there are 500,513 long positions of non-commercial contracts of light sweet crude oil futures, traded on the New York Mercantile Exchange by hedge funds and dealers, an increase of 16,168 long positions from last week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

This is compared to about 406,961 short positions, an increase of 18,843 short positions from last week where light sweet crude oil contracts are traded in units of 1,000 barrels. Hedge funds and dealers have slightly increased their net short positions by about 2,675 contracts, as traders believed there would be a further decline in the crude oil price.

Technically, the crude oil price has been moving in a bearish downtrend since June. The crude oil price was unable to break out the 100-day SMA and fell back to the support level at $44.33 a barrel, or the 50% Fibonacci retracement. A bearish head and shoulders chart pattern has emerged.

The increased probability of a Fed rate hike would put selling pressure on the crude oil price, in addition to the global oil glut. The federal funds futures, traded on the Chicago Mercantile Exchange and commonly used to estimate the market’s views on the likelihood of changes in U.S. monetary policy, indicate 69.8% odds for a half-point rate hike at the Fed's December FOMC meeting, according to data from the CME Group as of November 6. 

There are technical supports at around $42.78 per barrel, or the 61.8% Fibonacci retracement level, and the $42.50 per barrel trendline resistance of the symmetrical triangle (SYM TRI), respectively. A strengthening U.S. dollar could send the WTI crude price back to retest the August low of $37.75 per barrel, or the early-2009 low of $33.55 per barrel.

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