After trading up to its highest level since 2011 earlier in the year, Crude oil is now marching higher once again, putting the 2018 high (and beyond) back in focus. The moves come on the back of OPEC and non-OPEC oil producers failing to agree to a production increase at the latest meeting held over the weekend and early this week. The only outcome of these meeting was a pledge by Saudi Arabia to increase its oil production only in the event of growing demand.
Plethora Of Elements Boosting Oil
However, the failure to agree on a deal at these meetings is not the only factor currently driving oil higher. Crude is also being fuelled by the fast approaching 4th November US sanctions on Iran, which will likely take as much as 1.2 million barrels per day off the market, as well as the continued decline in Venezuelan oil production due to diminished infrastructure, terrorist attack on foreign oil operations within the country and US sanctions on the Caracas government. Oil production in the country is now down by around 1 million barrels per day to 1.5 million barrels per day with some forecasts citing the likelihood that it will fall further to near just 1 million barrels per day by year-end.
The combined force of these supply side constraints along with the failure of OPEC and non-OPEC producers to formally agree a production increase has lead to a growth in forecasts for crude to hit $100 by year-end. This level marks around 80% up of the range that price traded in from 2011 – 2014 before we saw the sharp decline which took price below $30 followed by a 25% recovery rally in 2015.
USD / Oil Correlation Shifting
Given the rising probability that oil trades up into this region again it is worth considering what the repercussions might be for the US Dollar. Traditionally, oil has been negatively correlated with the US Dollar rising as the Dollar falls and falling as the Dollar increases. However, recently, we have seen this correlation shift to a positive one. One potential reason for this is that the US has now become self-sufficient as a net producer of oil. On this basis, a positive correlation is explained as higher oil prices translate into positive terms of trade outcome for the US.
High Oil Bad For US Consumers
However, it is important to note the idiosyncrasies that oil has over other commodities and its direct link with US consumers. To this end, although oil and USD can be seen sharing a positive correlation over irregular short-term intervals, in the long run, higher oil prices are bad for US consumers and therefore the US economy. Indeed, looking at the periods of time where oil and USD have been trading with a positive correlation, the stand out factor is higher US Treasury yields. When a move higher in USTs have accompanied a move higher in oil, USD has tended to perform well.
USTs The Key To Positive Correlation
Consequently, a negative correlation tends to be the default setting which explains why President Trump slams higher oil prices and criticises OPEC as well as demanding production increases from Saudi Arabia and other key producers. With this in mind, barring any move higher in USTs, USD is likely to weaken in the medium-long run if Oil trades back up to $100 and beyond.
The main focus is now on a retest of the year to date high (and 2011 low) around 75.15. Above here and the next technical resistance level will be the 61.8% retracement from 2014 highs around 79.51. To the downside, support is seen along the bullish channel base which, while intact, keeps focus on the further upside.