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Bottom fishing for oil in murky waters

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Carlsquare
29/09/20222 min read
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The parabolic rise in US interest rates and the US dollar is taking its toll on international financial markets. Below we show the correlation between S&P500 (SPX) and the USD.

U.S Dollar Index (DXY), over five years

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Source: Stockcharts and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The oil price is no exception and Brent Futures are down some seven per cent this month. Hence, the downtrend since the end of June continues. However, there have been some upward moves of around ten per cent each along the way, notably in July and August.  

Brent Futures are now trading close to the floor of the trend channel and in recent days seem to have bounced off this support. Is it the beginning of another substantial countertrend move like those we have seen previously?

Brent Crude Oil (in USD), daily 12-month price chart

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Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

For this to happen the dollar is a major factor as illustrated above. At some point dollar appreciation will come to a pause, perhaps following central bank action or “Plaza accord,” however timing is hard to predict. When it happens, equity markets, but also oil, should rally.

Regardless, oil has a relative “advantage” to, e.g., equities as current geopolitical concerns should help underpin the price. There are no signs of a conclusion to the war in Ukraine yet, quite the opposite. The energy crisis in Europe continues and the supply of natural gas is constrained, to say the least. In relative terms, oil looks rather cheap.

From a technical perspective, the oil price is still in a negative trend below MA 200. We believe the level of around USD 85 is quite important as it represents the high of last year. Further below the weekly MA100 of USD 81 is a first target in a negative scenario. In a bull scenario, we see a bear market rally to USD 96 as feasible.

Brent Crude Oil (in USD), five-year chart from September 2017 to September 2022

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Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:

EMA 9: 9-day exponential moving average

Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.

MA20: 20-day moving average

MA50: 50-day moving average

MA100: 100-day moving average

MA200: 200-day moving average

MACD: Moving average convergence divergence

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