Crude Weakness Ahead? (Part II)

The Dollar Reversal

In the first article of this three part series, I mentioned a bearish divergence forming within crude prices. The article depicted a chart displaying bearish divergence between crude prices, the MACD, and RSI.

In support of my bearish stance and reversal prediction, I need to address two other major influences that impact crude prices.

• US Dollar
• Supply/ Demand

We can almost always say that there is a strong correlation between the US Dollar and the price of crude. Commodities such as crude and gold are considered valid hedges against any dollar weakness. As the US dollar appreciates, commodities priced in USD rise and vis-versa.

Therefore, there is an inverse correlation between oil and the USD.

Recently the dollar has been under pressure, thus, helping drive crude prices higher. To support my bearish stance on crude, the dollar should show a sign approaching a short-midterm bottom.

After analyzing the US Dollar Index, a bullish divergence has formed between the USD Index and the RSI.

In the chart above, I have identified trendline resistance and support levels which support the formation of a bullish divergence in the USD. If the divergence above proves to be valid, the US Dollar Index could trend as high as 82.5, sending the crude prices to $60-$65, and the USO could retrace to $34-$35 range by the end of the month.

Disclosure: At time written, author did not own any securities of USO, but looking to accumulate option puts in the near future. Author is looking to buy the USD and sell the CAD.

Comments

[The Greates...:]

Oil around $35-$40 by Dec 09.

Aug 24 08:22 AM

[Ivan Kitov:]

Oil at $100 around Dec.
seekingalpha.com/artic...

Aug 24 09:55 AM

[Ferdinand E...:]

Funny, but although I keep telling people that I am the leading academic energy economist in the world, I've never spent a minute looking at the possible correlation between the oil price and the 'dollar price'. Maybe its because I'm too lazy, or maybe I dont think that it's important.

Anyway, about those two predictions of the oil price just above, the first one is out of the question. The OPEC directorate isn't going to let that happen. As for the second one, that doesn't make a lot of sense to me either, although it could happen. The OPEC people say that they don't want to ruin the world economy, and oil at $100/b might cause that to happen

Aug 24 10:44 AM

[Vuke:]

Ivan, I like the way you bring mathematical rigidity to a system which, essentially, is in resonance with a host of underlying impulses. (OPEC, Hurricanes, Chavez, Iran etc)

The trend is up, certainly, but, like waves in the sea, you can never tell when the rogue wave will arrive unless you attune your calculations to all significant undercurrents and get the timing right.

PPI alone doesn't cut it.


On Aug 24 09:55 AM Ivan Kitov wrote:

> Oil at $100 around Dec.
> seekingalpha.com/artic...

Aug 24 12:06 PM

[jerrydd:]

While we'll go down or at least should until next spring, after that as the world recovers, price of oil will hit $150-200/bbl or whatever price causes another recession.

At Least Ferdinand E is modest ;^P , but is again wrong that OPEC will stop the price of oil from rising as it can't. That was proven in 7-08, No?

Until we, the world gets off oil expect recessions every 2-3 yrs with gas, diesel going up $1/gal/yr until it hits $10/gal when it's price drives customers from it to cheaper alternatives. All in constant $.

Aug 24 01:36 PM

[The Greates...:]

By now anyone who every considered the supply and demand theory as a viable reason for the huge fluctuations in the oil and gas industry pricing must now come to terms that is was (and still is) bogus. The world is a washed in crude oil today. And yet, still the price goes up just in time for Labor Day week-in.
As for OPEC and the 5 major oil companies, the sky is the limit as long as the world is dependent on oil as a major energy source. So many alternatives to oil, but so much $$$ to make if we stay the same, people in the US are putting school supplies on lay-away. I just can’t see oil going any higher, the global economy will not support 2008 repeat in price.

Aug 24 03:49 PM

[Whitehawk:]

While there is an inverse correlation between the dollar and crude, it is not "strong" from the mathematical sense, and there is certainly no unidirectional causality between the two - it is bidirectional and perhaps chaotic.

Aug 24 04:08 PM

[jerrydd:]

Hi Alan,
If everyone hits the abuse button he should be gone.


On Aug 24 05:51 PM Alan von Altendorf wrote:

> FYI, the Cetin worm launches in IE if you merely hover over his link!
>

Aug 24 07:51 PM

[Herman Hemati:]

I have reported the guy posting all the links.

Aug 24 09:29 PM