The price of oil has decoupled a bit from the dollar. Not on the long term correlation – one year or more – but on the shorter term. The dollar wants to find out what it will do when the Fed raises rates tomorrow by ¼ point.
Oil is trying to find a bottom – and I think that bottom may be in. $32 was the long term bottom from the financial crisis, and we tried to test that low price this week. The test was a failure – and I think that it was the big capitulation down move. If oil had gone below $32, it would have opened the door for a lower low in the 20’s.
The technical guys have now given way to the fundamental traders in the oil pits. For the last few months, the story in oil has been how stubbornly the US oil production has held up. This has allowed the technical traders to move oil prices. It may be time for the fundamentals to take over.
The truth is that at the beginning of 2015, non OPEC production was increasing at an annual rate of 2.2 million barrels per day. Now, that increase is only 0.3 million barrels per day. Not exactly balance, but moving in the right direction. The fundamental traders don’t need immediate relief – they just want to see the numbers moving in the right direction. That’s what will give us a bottom – and it just may be here.
The chart below shows how oil prices have moved in three down-moves, and each successive move has been smaller than the previous. The third time may be the charm.