Crude oil extends rally to test 200 MA

In response to a weaker headline US inflation print of 5%, energy and metal prices rose as the dollar dropped. While gold and silver have since come off their earlier highs, copper has managed to push higher. But it is crude oil that is catching the attention with both contracts up more than 2% each.

Why are oil prices rising?

Well, the biggest reason is from the supply side of the equation, as it often is when it come to oil prices.

Following the OPEC’s surprise decision last weekend to cut oil production unexpectedly by nearly 1.7 million barrels per day, this has so far had the intended impact in keeping oil prices supported. After a week-long consolidation near the 80 level, oil prices have started move higher this week, with WTI climbing above 83 today.

Crude oil has also been supported in part because of the ongoing weakness in US dollar, optimism about Chinese pent-up demand, and the recent upsurge in other commodity prices like gold and silver.

The weaker US CPI print has raised doubts over whether the Fed will now hike rates at all next month, after a 25bp hike was priced in with a 75% probability for the May 3 FOMC meeting. Now, that probability has fallen to around 66%, suggesting investors who are feeling that the Fed is near the end of the hiking cycle will feel even more comfortable now.

Falling interest rate expectations is reducing recession concerns and helping to support buck-denominated asset prices at the same time.

Improving Eurozone economy

Crude oil is also finding support because of an improving European economy. While we haven’t had much European data this week, the closely watched Sentix Investor Confidence, which came out on Tuesday, improved more than expected to -8.7 from -11.1, reflecting the recent improvement in Eurozone data.

Indeed, last week, we saw German industrial production jumped 2.0% month-over-month in February, easily beating the 0.1% increase forecast and adds to the 3.7% gain in January. In addition, we saw German factory orders surged 4.8% MoM, while the eurozone composite PMI rose to a 10-month high. As result of the improvement in data, Germany is now expected to avoid a recession. Indeed, a couple of German economic institutes now think the Eurozone’s largest economy will grow this year. The German economic recovery has been supported by the reopening of China and strong activity in the automotive sector. Indeed, we saw German exports surge higher in February while imports also rose. More significantly, the German trade surplus has been noticeably higher at the start of this year compared to Q4. The improving German economy and receding concerns over an energy crisis is why the German DAX index has been able to outperform its Wall Street peers so far this year, and why the EUR/USD has been able to get close to the 1.10 handle. But it is not just Germany. A few other Eurozone countries have also been doing relatively well, not least Spain, where the services sector has been going from strength to strength.

WTI’s breakaway gap

As mentioned in our previous update, WTI was unlikely to fill that big gap it had formed when the OPEC surprised the market with its decision.

It had the characteristics of a breakaway gap. After 1 whole week of consolidation around the key 80 level, WTI never looked like it wanted to close that gap. This gave traders the confidence that they need that the market wants to push higher, and so they have started to bid oil priced higher again.

From here, WTI could go to reach $85.00 and eventually even $90.00.

In the short-term, I wouldn’t rule out a dip back towards broken resistance range between $81.00 to $81.80ish, given that it is testing its 200-day average.

This $81.00 to $81.80 area is now going to be the most important support zone to watch. For as long as the bulls hold their ground here, the path of least resistance would remain to the upside.

-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R