1/ Dollar Index Powers Higher
2/ Crude Backing Off
3/ Heating Oil Reversed
4/ Gasoline Prices Roll Over
5/ Natural Gas and Energy
Investopedia is partnering with CMT Association on this newsletter. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.
1/ Dollar Index Powers Higher
The financial market is an intricate web, where certain variables influence the movement of others and relationships between assets are closely examined. One asset pair that has caught my attention since my early days in the industry is the interaction between the Dollar Index and Crude Oil prices. Generally, a strong U.S. Dollar tends to weaken the price of commodities like Crude Oil. While local demand conditions can undoubtedly affect the price, this fundamental relationship aligns with my core perspective on the market. As evidenced by the chart, the U.S. Dollar Index is on an upward trajectory.
So, with the Dollar Index so strong, it is no wonder that the price of Crude has backed off over the past month. But I wonder, is the price of Crude influenced by the price of the Dollar or something else? I think it is a little bit of both. So, what is the other factor? Weather! AccuWeather’s latest release shows that this is expected to be a mild winter, with prices 2-3 degrees warmer on average. If temps are higher, what are the implications?
2/ Crude Backing Off
The recent surge in the Dollar Index aligns with a drop in Crude Oil prices, which had previously seen a sharp increase in September. This reversal took place towards the end of last month and has brought the commodity’s price back to its crucial 65-week moving average. The trading community appears divided over several key influences: geopolitical tensions in the Middle East, current demand conditions for West Texas Intermediate, and the outlook for future demand shaped by weather forecasts.
One factor that provides some support I have been sharing in regards to Bitcoin and the equity markets earlier this week is liquidity. This factor is favorable for Crude oil’s price at the moment, which supports the idea of a bounce. But as I wrote yesterday regarding Bitcoin, liquidity is range bound and if it tightens, it will have a negative effect on crypto – it would also have a negative effect on Crude and energy prices. While liquidity is significant, a bigger factor for me is the direction of heating oil.
3/ Heating Oil Reversed
As the chart shows, Heating oil turned lower before the Dollar surged higher and the crude price fell from its peak. At the time, I started to hear the news of a warmer winter and began to watch the inventory picture from the DOE a bit closer (you can find that data here: https://www.eia.gov/petroleum/supply/weekly/ ).
The inventory picture was favorable for prices but with the arrival of September, the picture has improved and is weighing on prices. While still not at the top of 5-year ranges, the picture is slowly moving that way. Add in warmer weather and things move quickly against Heating oil. My belief in the energy markets for the winter can be summed up best by “so goes heating oil, so goes the market.” Weak fundamentals will weigh on heating oil and drive energy prices lower.
4/ Gasoline Prices Roll Over
One factor I do not usually consider at this time of the year is Gasoline for the price of Crude direction. Still, this week’s chart is too hard to ignore – it has reversed lower into the previous range, arguing that gasoline prices are falling. If gasoline prices continue to fall, this will lead to overall lower energy payments for the average consumer.
Based on this chart, it looks like Gasoline is heading for the $2 level in the wholesale market, arguing for sub $3 at the pump sooner than later for the consumer. This could encourage more travel by the consumer and stronger growth and demand for energy, but I believe it will not be large enough to offset the fall in heating oil demand.
5/ Natural Gas and Energy
The last factor to review in this study is the price of Natural Gas. It has been a tough call for the past year, sitting between $2.50 and $3 before breaking out five weeks ago (coincided with weak crude oil). The contract has climbed to the 65 week MA but I don’t see that extending much unless the weather story changes and global issues on the LNG side return. Natural gas usage will rise no doubt but is heavily influenced by weather. Also, fundamentals for this product are at the upper end of 5 year averages. In all my years of the markets, I have not seen Natural gas extend when this happened prior. Further, if the weather will be warmer, things will worsen.
So, the point here is simple. On a global scale, crude oil has the Dollar working against it. If the Dollar climbs, this will put downward pressure on Crude. Second, if the weather is indeed warmer this winter, this will create weak demand for Heating oil and Natural gas. This will drag on the energy sector, pushing crude lower, even with geopolitical risks. While the chart currently supports Crude, sitting above the 65 week MA, the factors are lining up against it in the month’s head.
—
Originally posted 27th October 2023
Disclosure: Investopedia
Investopedia.com: The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described on our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. This information is intended for US residents only.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Investopedia and is being posted with its permission. The views expressed in this material are solely those of the author and/or Investopedia and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Forex
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.
Join The Conversation
If you have a general question, it may already be covered in our FAQs. If you have an account-specific question or concern, please reach out to Client Services.