Crude Prices Get Support From A Weaker Dollar

U.S. West Texas Intermediate crude oil futures are edging higher on Friday, putting it in a position to post its fourth straight weekly gain. The catalysts behind the buying strength are supply constraints and a weaker U.S. Dollar. Meanwhile, traders appear to be unfazed by reports that China is set to release crude reserves around the Lunar New Year. The feeling is that there is enough growing global demand to absorb any increase in supply.

US Dollar Headed for Large Weekly Decline

The surprise story this week is the steep drop in the U.S. Dollar despite nearly 90% certainty of a Federal Reserve interest rate hike in March. The dollar is experiencing its worst weekly decline in over a year, making dollar-denominated WTI crude oil a more attractive asset to holders of foreign currencies. This could lead to an even more pronounced drop in U.S. crude oil stockpiles.

China to Drop More Oil on the Market                                                  

Sources told Reuters that China plans to release oil reserves around the Lunar New Year holidays between January 31 and February 6 as part of a plan coordinated by the United States with other major consumers to reduce global prices. The U.S. Energy Department on Thursday said it had sold 18 million barrels of strategic crude oil.

The plan to drive prices lower by increasing supply doesn’t seem to be working with March WTI crude oil overtaking its October multi-year high earlier this week, but then again perhaps the market would be challenging $100 per barrel if the U.S., China and other allies did nothing.

$100 Dollar Crude on the Radar

Oil prices that rallied 50% in 2021 will power further ahead this year, some analysts predict, saying a lack of production capacity and limited investment in the sector could lift crude to $90 or even above $100 a barrel, according to a report from Reuters.

Bank analysts are saying oil prices will be supported by the reluctance of many governments to restore the strict restrictions that hammered the global economy when the pandemic took hold in 2020.

In order to get to $100 a barrel, demand from China and the United States has to continue to grow and OPEC+ is going to have to stick with its plan to limit supply.

Fed Chair Sees Strong Recovery

Most of this week’s gains took place on Tuesday when U.S. West Texas Intermediate soared over 3.50%, boosted by tight supply and speculative bets that rising coronavirus cases and the spread of the Omicron variant will not derail a global demand recovery.

Support was provided early in the session on Tuesday after Federal Reserve Chairman Jerome Powell testified that the U.S. economy is strong enough to withstand Fed tightening and the current Omicron surge. This news was powerful enough to send both WTI and Brent crude oil futures to new contract highs.

Federal Reserve Chair Jerome Powell, in a congressional hearing that pointed to his likely confirmation for a second term as head of the U.S. central bank, said on Tuesday the economy should weather the current COVID-19 surge with only “short-lived” impacts and was ready for the start of tighter monetary policy, Reuters reported.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out $80.72, hitting a new contract high in the process.  A move through $62.05 will change the main trend to down.

The minor trend is up. It changed to up the week-ending December 24 when buyers took out the minor top at $72.82. This shifted momentum to the upside. A trade through $65.93 will change the minor trend to down.  

Retracement Level Analysis

The market is currently trading on the strong side of a minor 50% level at $74.03 and the main 50% level at $72.09, making both of these levels support.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending January 21 will be determined by trader reaction to the former contract high at $80.72.

Bullish Scenario

A sustained move over $80.72 will indicate the presence of buyers. If this move is able to continue to generate enough upside momentum then look for a short-term test of $83.74 - $84.18. Taking out $84.18 could trigger a possible surge into $87.50 over the near-term.

Bearish Scenario

The inability to sustain a rally over $80.72 will indicate the presence of sellers. It won’t be a particularly bearish signal, but it may mean that buyers view the market as overvalued at current price levels. This would encourage longs to take profits. This could drive the market into a value zone or $74.03 - $72.09 where new buyers would come like re-emerge.

Short-Term Outlook

Hedge funds and money managers continue to support the rally despite its lofty price levels. Furthermore, traders don’t seem to be rattled by mixed economic data and the Federal Reserve’s hawkish tone. Additionally, the pullback in the U.S. Dollar is making dollar-denominated crude oil more attractive for foreign buyers.

However, the major bullish factors remain expectations of strong global demand despite the Omicron breakout, OPEC+’s continued plan to limit supply and extremely low supply in the United States.