Oil prices dropped 36 percent during the fourth quarter of 2015 and the first quarter of 2016, only to rebound back to roughly $53 just six months later. More recently, oil dropped 23 percent only to rebound back to nearly $50 again. With all the up and down volatility, traders have been eyeing the $45 mark as fair value for oil where supply meets demand.
With oil above $45, traders begin to focus on the Federal Reserve tightening, a stronger dollar, potential weaker demand globally and oil producers turning on the spigots - all the things that would be a reason to sell oil. With oil below $45, the reasons to buy oil surround the talks about OPEC production cuts and Chinese demand picking up. So the question is when does oil break the range and pick a direction, or is it as simple as buy crude below $44 and sell above $46?
To determine whether a breakout can occur, it's important to first get a read on how oil has moved in relation to the economy and if such economic conditions could push oil in one given direction out of its range. Currently, the U.S. economy has been most influenced by outsized moves in the price of gold, consumer prices, and M2 money supply (by the way, the Fed is still printing money according to the graph below) over the last year while corporate bond yields continue to fall.