- Crude set for biggest weekly gain since July on escalating geopolitical risks, demand premium
- EIA data took a back seat to geopolitical risks that took Crude to highest levels since Dec. 2014
- Per BHI, U.S. Oil Rig Count rises 7 to 815, US Total Rig Count at 1,008
- IGCS shows growing net-short retail positioning in WTI – US Oil, favoring bullish pressure
Crude oil was at the epicenter of geopolitical risk last week due to Yemeni missiles heading for Riyadh being intercepted and US President Trump threatening a barrage of missiles toward Syria. In a change of events, the reduction of trade war threats was replaced with possible real war, which was a concoction that caused oil bulls to bid the commodity market to the highest levels since 2014 and pushed WTI Crude closer to $70/bbl.
Volatility Now Brings Upside Price Risk That Also Includes Inflation Risks
Data source: Bloomberg
Traditionally, volatility is accompanied by downside price shocks. As you can see above, 2-month realized volatility spiked when price bottomed in early 2016. However, recently we’ve seen 2-month realized volatility at the highest levels of the year with price pushing to the highest levels since December 2014.
The increase in crude oil is incredibly important as it often brings inflation behind it as a key macro development. Inflation has been called the silent killer of bull markets that appears to be making a comeback with a perfect storm seems to set up commodities as Goldman Sachs said this week that the case for owning commodities has rarely been this strong.
Additionally, OPEC said its output fell to the lowest in a year last month while the IEA has said demand remains on track with previous estimates. This combination suggests global markets are poised to tighten sharply, which could exasperate the upside and extend backwardation.
Also, with all the talk about at a US yield curve on its way to inversion, traders should also note that the previous two recessions were foretold by a surge in crude oil prices.
Future’s Spread Backwardation Shows Buying Pressure at 4-Year High
Time spreads of futures contracts are one of the purest ways to get a pulse on the demand to buy now or later. When a front-month contract trades at a premium to a later dated contract, known as backwardation, the implication is that the benefits to hold due to either supply shortage or increasing demand outweighs the costs to hold such as storage, insurance, etc.
Recently, the backwardation on the Brent December 2018-December 2019 contract traded to the strongest level in almost 4-years with the Dec. 2019-Dec. 2020 also showing an expanding backwardation as the market draws support from geopolitical risks and OPEC-led supply cuts.
Data Source: Bloomberg, Chart created by Tyler Yell, CMT
There’s a global rise in oil demand! Click here to see our Q1 forecast on what outcomes we’re watching!
Technical Focus for Crude Oil – Bullish Resumption despite Highest Level in 3 Yrs.
Chart Source: ProRealtime, IG UK Price Feed. Created by Tyler Yell, CMT
The technical focus on WTI Crude Oil remains bullish as WTI looks destined to test the 100% Fibonacci extension off the 2017 low at $70.16/bbl. Only a break below the supporting trendline would open up a likely test of the 200-DMA at ~$56/bbl.
Bears who continue to focus on some of the bearish fundamentals such as record-high US production and possibly slowing demand can keep an eye on Ichimoku (applied to the chart above) for evidence that a catalyst may have brought their views into play. For now, with the price above the Ichimoku cloud, WTI looks to have room for another leg up.
Learn how to utilize Ichimoku Cloud in our FREE guide here
If you want to see Ichimoku Analysis in action, check out my new report, Ichimoku Charts that Matter
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Monday: Kuwait Oil & Gas Summit, Kuwait City with speakers including OPEC Sec.-Gen. Barkindo
- Monday: EIA’s Monthly Drilling Productivity Report
- Tuesday 04:30 PM ET: API issues weekly US Oil Inventory report
- Wednesday 10:30 AM ET: EIA issues weekly US Oil Inventory Report
- Wednesday: JODI Issues World Oil exports, output data
- Thursday: API Monthly Statistical Report
- Thursday: OPEC’s Joint Technical Committee meets in Jeddah, Saudi Arabia
- Friday: OPEC’s Joint Ministerial Monitoring Committee meets in Jeddah, Saudi Arabia
- Friday 1:00 PM ET: Baker-Hughes Rig Count
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
Crude Oil Insight from IG UK Client Sentiment:Contrarian view of retail positioning favors bullishness
Oil – US Crude: Retail trader data shows 35.5% of traders are net-long with the ratio of traders short to long at 1.82 to 1. The number of traders net-long is 9.2% higher than yesterday and 10.2% lower from last week, while the number of traders net-short is 4.6% lower than yesterday and 36.0% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise.
Discuss this or other markets you’re trading with me below!
—Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.
Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.
Talk markets on twitter @ForexYell
DXY Index Pacing for Gains Everyday this Week
– After a reprieve yesterday, US-China trade war concerns are materializing again after the latest Chinese trade balance report showed that its surplus with the US widened; USD/CNH was back near its highest close of 2018.
– US President Trump’s comments on the state of Brexit have rekindled concerns about the viability of the Theresa May government; GBP/USD is at its lowest level since July 3.
– Sentiment for the US Dollar continues to suggest a neutral outlook after recent price developments.
For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.
The US Dollar (via the DXY Index) is pacing to gain everyday this week and due to post its first string of five consecutive up days since May 14 to 18. With trade concerns have been seemingly ebbing and flowing every day in recent memory, attention remains focused on any new developments on the US-China trade war front.
The offshore Chinese Yuan is weakening once again as market participants are divining the next move’s in the US-China trade war based on recent trade data. While some of the growth figures from the world’s second largest economy have been less than impressive recently, what has stood out is the fact that China’s trade surplus with the United States just grew to a new record surplus.
Given that US President Trump has turned his attention to countries that enjoy trade surpluses with the United States – Canada, China, Germany, Japan, among others – it would be logical to suggest the latest Chinese trade figures will not help ease tensions any further. Instead, it seems likely now that US President Trump will push harder for the new tariffs on $200 billion of Chinese goods, even if China is trying to back away from the ‘tit-for-tat’ type of negotiations.
Elsewhere, the British Pound is suffering as US President Trump and UK Prime Minister May convene in London. Ahead of the US president’s arrival, a wide-ranging interview was published in The Sun that was nothing short of an exocriating critique of how Brexit has gone under the current UK government’s watch.
Saying that a UK-US trade deal would be off – one of the reasons Leavers said would help soften the blow of a Brexit – US President Trump may have just poured fuel onto the fire of whether or not the May government will last following the wave of resignations last week. While still unlikely, a collapse of the May government ahead of the August Bank of England meeting could prove to provoke another hold in rates, setting the Sterling up for disappoint down the road.
DXY Index Price Chart: Daily Timeframe (July 2017 to July 2018)
Overall, as has been the case throughout the week, the US Dollar’s (via DXY Index) technical posture continues to improve, but isn’t fully bullish on a momentum basis just yet. Price continues to hold above the daily 8-, 13-, 21-EMA envelop in sequential order as the DXY Index has now moved up to its highest level since July 2.
Daily MACD and Slow Stochastics both remain in bullish territory and are on the cusp of issuing ‘buy’ signals, suggesting that a return to the recent highs is possible. A move through the June 21 bearish daily key reversal and June 27 to 29 evening doji star candle cluster highs at 95.53 is necessary to truly reinvigorate US Dollar bulls.
FX TRADING RESOURCES
Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail firstname.lastname@example.org
Follow him on Twitter at @CVecchioFX
US Earning Season Begins, GBP Slides on Trump
Check out the brand new DailyFX trading forecasts for Q3
MARKET DEVELOPMENTS – GBP FALLS AS TRUMP CRITISES PM MAYS BREXIT PLAN
At the last earning season, US corporate results had reached its best level in over 7 years with earnings growth of 24.8% and revenue gain of 8.7%. This trend is set to continue for this earning season with S&P 500 earnings growth expected to be above 20% again, given the backdrop of strong economic growth in the US and a boost from the Trump administrations tax overhaul continuing to support US corporate names and boost confidence. As such, if indeed US corporate results exceed expectations this could provide a nice distraction for equity traders and continue to buoy major equity markets.
GBP: The Pound had taken a hit after more negative headlines surrounding PM May’s Brexit strategy in which reports noted that President Trump had warned PM May that a soft Brexit proposal will kill prospects of a trade deal between the US and UK. This subsequently, pushed GBPUSD back towards 1.31 after losses had been exacerbated after a breach through 1.3175. Elsewhere, comments from the usually dovish BoE member Cunliffe had provided support for the Pound, having delivered a speech that was somewhat leaning on the hawkish side, subsequently boosting hopes that the BoE will deliver a rate hike next month.
USD: The Dollar index is moving back towards familiar technical resistance, suggesting that further gains could be limited with notable resistance potentially capping price action yet again. Focus continues to remain on the latest developments on US-China trade spat, which has quietened down since Tuesday.
NZD: The Kiwi is partially weaker on the higher greenback, edged even more so cautiously lower when local business manufacturing PMI underwhelmed. In New Zealand, that reading fell to 52.8 in June from 54.4 in May. That was the weakest reading since December 2017, making it a new 2018 low.
DailyFX Economic Calendar: Friday, July 13, 2018 – North American Releases
DailyWebinar Calendar: Friday, July 13, 2018
IG Client Sentiment: GBPUSD Chart of the Day
GBPUSD: Retail trader data shows 70.4% of traders are net-long with the ratio of traders long to short at 2.38 to 1. In fact, traders have remained net-long since Apr 20 when GBPUSD traded near 1.40897; price has moved 6.7% lower since then. The percentage of traders net-long is now its highest since Jul 05 when GBPUSD traded near 1.32203. The number of traders net-long is 3.4% higher than yesterday and 2.4% lower from last week, while the number of traders net-short is 6.1% lower than yesterday and 4.2% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPUSD-bearish contrarian trading bias.
Five Things Traders are Reading
- “DXY Index Pacing for Gains Everyday this Week” by Christopher Vecchio, CFA, Sr. Currency Strategist
- “USD Technical Analysis: DXY at Familiar Resistance Yet Again, will it Hold?” by Justin McQueen, Market Analyst
- “Charts for Next Week: EUR/USD, Euro-crosses, USD/JPY, Gold Price & More”by Paul Robinson, Market Analyst
- “Trade War Risk to be Offset by US Q2 Earning Season”by Justin McQueen, Market Analyst
- “GBPUSD Update: Sterling Hammered by Trump on Brexit” by Nick Cawley
— Written by Justin McQueen, Market Analyst
To contact Justin, email him at Justin.email@example.com
Follow Justin on Twitter @JMcQueenFX
Fed Testimony, China GDP and Earnings Compete with Trade Wars
The US dollar should be powering ahead based purely on economic fundamentals but the over-arching threat of global trade wars is reining in the greenback’s performance.
The overhang of Brexit continues to provide an uncertain outlook for the Pound. However, strong UK data could potentially see GBP post marginal gains.
The Canadian Dollar was unable to capitalize on a hawkish BoC amidst trade war concerns. Ahead, the US might impose auto import tariffs and local CPI could miss, undermining CAD.
The Humphrey-Hawkins testimony may influence the near-term outlook for USD/JPY as Fed Chairman Jerome Powell is scheduled to appear before Congress.
Crude oil has avoided the fate of other commodities that have been hit very hard by trade war fears. A massive drawdown in US crude stockpiles may help the argument of Bulls, but by how much remains unclear.
Gold is once again testing critical support ahead of next weeks Fed testimony- it’s make-or-break here. These are the updated targets & invalidation levels that matter.
The week ahead doesn’t hold much in the way of major market moving events on the calendar, but that doesn’t mean there aren’t risks out there; the general outlook is indecisive at the moment.
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.
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