Oil Has Best Week In 2017 On OPEC Hopes

Mar 31, 2017

Talking Points:

• Crude Oil Technical Strategy: price bounces from 61.8% retracement of November-Jan Range
• Crude Oil Prices May Extend Rally Triggered By Inventory Data
• Crude Oil Sentiment Available at DailyFX+

In a divorce from typical correlations, both US Dollar via the DXY and Crude Oil have found life at the end of Q1 17. Month end flows tend to be erratic, and thus, the broader multi-week trend should take preference over the multi-day move. However, the overall correlation of DXY & USOIL has dropped to a level of near meaningless with a 20-day correlation as of March 30 of -.138.

In addition to the erratic end of month order flow, it’s worth keeping an eye on the headlines for Crude Oil, which have recently touted initial support from OPEC members to extend the cut. The Production, which reached agreement in late November is scheduled to expire in June, but the option to extend the cuts were seen as a possibility if such action would help secure a balancing in the Oil. Given the large rise in Shale production in the US, which has seen a doubling of active Oil rigs since the May 2015 low per Baker Hughes International, a production cut extension from OPEC and likely Russia, could go a long way in putting a higher price floor under Oil.

CRUDE OIL – Technical Analysis: Whether or not Crude Oil is correcting a downtrend or beginning a new rise to 2017 highs is the key questions. The price is at a key juncture whereas a corrective move higher, that would favor new lows would favor price resistance near $52/bbl. Specifically, $51.97 is the 61.8% retracement of the late-February to March range. A turnaround lower below or near $52 that subsequently breaks below $47 would open up a move to the $40-44 zone we’ve long watched as likely support in a more significant downturn.

However, absent the risk of a turnaround lower in Crude, traders should watch for a clean break higher to nullify the view that we’ll see an extension lower. Traders would do well to watch a break above $52 as an argument that Crude may have put in another higher price floor near the 200-DMA ($48.63/bbl.).

The price action in late March has looked like consolidation, but one concern worth mentioning is the strong bounce in RSI(5). The bounce in RSI(5) looks corrective, which favors a trend continuation move lower and possibly to the $44/40 zone in the coming weeks if further weakness surfaces.

IG Retail trader data shows 65.1% of traders are net-long with the ratio of traders long to short at 1.87 to 1. In fact, traders have remained net-long since Mar 01 when Oil - US Crude traded near 5433.1; theprice has moved 7.2% lower since then. The number of traders net-long is 12.0% lower than yesterday and 9.5% lower from last week, while the number of traders net-short is 23.2% higher than yesterday and 7.3% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude prices may continue to fall. Traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil - US Crude price trend may soon reverse higher despite the fact traders remain net-long.

Source: DailyFX