Morning Futures Roundup

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Are the U.S. Dollar and Crude Oil Joined at the Hip?
 Fundamentals

It would certainly appear that way, as continued weakness in the U.S. Dollar has sparked a stampede into the Crude Oil market lately. On Wednesday, the lead month December Crude Oil futures soared to yearly highs, nearly touching the $82.00 price level. This was the highest nearby futures price since October of 2008.

Among the many reasons behind Oil’s price rise are signs of an economic rebound, especially in Asia, and to a lesser extent in the U.S. and Europe. The recovery is expected to increase the demand for Oil worldwide as industrial demand improves. However, looking at near-term supply and demand in the U.S., the high prices do not seemed justified.

Oil stocks (excluding the SPR) are up 10 % from year ago levels. Gasoline supplies are up 7.5% and Distillate Fuel Oil up 33.2% as of October 16th, according to the Energy Information Administration (EIA). Not only are U.S. Oil inventories higher than last year, but poor refining margins have caused refiners to curtail production. Wednesday’s EIA energy stocks report showed refinery utilization stood at 81.1% last week. This compares to 84.8% in 2008 and the 3-year average of 86.03 during the same time period.

So if refiners (who are actual users of Oil) are curtailing their Crude purchases, then who is buying and why? Large speculative traders are holding sizeable net long positions in Crude Oil, Gasoline, and Heating Oil according to the Commitment of Traders report. As of October 13th, large non-commercial traders were net long 151,631 Crude Oil contracts, 40,644 Gasoline contracts, and 35,271 Heating Oil contracts. This was up a cumulative 28,930 contracts for the week and shows that new buying was taking place as prices rose.

Many analysts believe that fears of rising inflation tied to a weak U.S. Dollar is behind the rise in Oil prices and commodity prices in general. Given the size and liquidity offered by the Oil market, this is a favorite area for some large speculators to initiate long positions as a play on potential increases in inflation.





Technical Notes

Looking at the daily chart for December Crude Oil, we notice prices surged higher once previous resistance just below the $77.00 area was taken-out on October 15th. The 20-day moving average has crossed above the 100-day MA, which many technicians consider a bullish signal.


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However, the 14-day RSI has moved into overbought territory, which may signal a potential price correction is overdue. Wednesday’s highs of 81.99 will now act as resistance for the December contract, with support seen at the previous intermediate high of 76.87.

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