Today’s session on the Nymex is pivotal for the oil market. After a massive two-day selloff at the start of the week, oil bulls, with tremendous help from a feeble U.S. dollar, have managed to regroup and claw back into the fray.
Yesterday (Thursday), spot WTI bottomed at 8:40am ET, i.e., 10 minutes after a spate of less-than encouraging economic headlines (PPI and jobless claims) were released. The U.S. dollar which had traded as high as €0.696 in early morning trading, tumbled after a retrace above 400K jobless claims in the U.S. were reported for last week.
The drop in the dollar sent WTI higher. To add insult to injury, WTI rallied despite the ICE Brent contract for May expiring with a whimper.
Weakness in the dollar is worrisome. The correlation between crude oil and the €/$ cross was 0.845 through the last decade. The coefficient of determination (R2) was 0.713. Intuitively, approximately 70% of the movement in oil from 2001 to 2010 could be explained by the €/$ cross; i.e. as the dollar fell (rose), oil rose (fell).
In the fourth quarter 2010 and first quarter 2011 this relationship broke down to a correlation of 0.283 and an R2 of only 0.08. However, since the start of the second quarter this relationship has re-coupled, with a vengeance. Thus, here we go again, as goes the dollar, goes oil… in the opposite direction.
With this in mind, today we have a number of big economic releases (CPI and Industrial Production being the two largest) coming out. These headlines will undoubtedly steer the direction of the dollar, which in turn, will steer the path for oil.
As far as Nymex oil is concerned, analysts at The Schork Report are advising clients that 107.50 is a critical point-of-reference in the May contract. As we highlighted in Tuesday’s Report, Monday’s 113.28 opening price took out last week’s 113.21 high print. Last week’s low print was 107.50.
Therefore, it’s make-or-break time. If the market closes today below 107.50 we will have an outside reversal week. That would be a significant technical indicator that the current bullish run in Nymex oil is indeed over and we are reversing to the downside.
As such, we figure bulls will throw everything they have today to defend 107.50. If they succeed and we finish above 107.50 then we will be forced off of our nearby bearish bias.
On the other hand, just as we said on Tuesday, if we close below 107.50 our bearish spirits will be very high. In other words… we have a rooting interest today for a rally in the dollar.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.