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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Crude At A Crossroads: Is A Reversal Top In The Making?

Since late September, the U.S. Dollar and crude oil have been rallying simultaneously with traders seemingly ignoring the typical relationship between the two assets. Since crude oil is a dollar-denominated asset, it tends to move in the opposite direction of the U.S. Dollar. In theory, a stronger dollar lowers demand for crude oil because it makes the asset more expensive to foreign buyers.

At times, however, we see pockets of activity on the charts when this relationship does not follow the “rules”. We may have just witnessed one of those times with speculators driving crude oil sharply higher on the news that OPEC has a deal in place to curtail output. At the same time, the U.S. Dollar rose sharply because of a rising in U.S. Treasury yields. Investors drove up yields as the chances for a rate hike in December increased greatly.

On October 20, crude oil fell more than 2 percent, erasing the previous day’s gains on profit-taking after the U.S. Dollar spiked higher after several days of sideways-to-lower activity due to worries over the timing of the next Fed rate hike.

In my opinion, crude oil traders started out a little tentative about playing the long side of the market because of the price action the day before.

Crude oil surged on Wednesday, October 19 after the U.S. Energy Information Administration reported its sixth drawdown in seven weeks. The move was primarily driven by the news of a drop of 5.2 million barrels, while refineries only ran at 85 percent. Traders also cited lower-than-expected crude imports as another possible reason for the draw.

Thursday’s weakness shouldn’t have come as a total surprise to chart-watchers, because the bullish news on Wednesday failed to trigger a decisive rally through last week’s high at $52.16. All the good news derived from the EIA report was only strong enough to take the market to $52.22, just six-cents higher than the previous week.

The market also closed below the previous high, indicating that the selling was greater than the buying at current levels. This also suggested that perhaps speculators were done buying strength on hopes and wishes regarding OPECs deal to curb output, and were now waiting for real evidence that the deal would be approved. This may not be known, however, until November 30 when the cartel meets in Vienna for its official meeting.

Other reasons for the developing weakness were the stronger U.S. Dollar,…




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