A Crude Oil Rally Above $40 A Barrel Is Unsustainable As The U.S. Economy Falters

Mar. 11, 2016 10:26 AM ETCVX, SLB, USO, XLE, XOM, OIL-OLD38 Comments
Ed Wijaranakula profile picture
Ed Wijaranakula


  • A crude oil rally above the $40 per barrel level is unsustainable in light of decelerating U.S. and global economic growth.
  • Crude prices previously showed a direct correlation with the 10Y/2Y yield spread, but began to decouple on speculation of an OPEC deal.
  • Unless crude prices stay decoupled from the yield spread, the price of crude oil is at risk of pulling back.
  • The XLE ETF could pull back to the $56.31 per share support level, if the WTI crude price falls.

The price of crude oil has been on a sharp rebound since plunging to the February 11th low of $26.05 per barrel, or the "Janet Yellen low", when Federal Reserve Chair Janet Yellen told the U.S. Congress on the second day of her two-day semiannual monetary policy report that overseas weakness and market distress could threaten the Fed's plans to raise the rate, but didn't explicitly mention any delays to interest rate hikes. The crude oil price now bumps into major head resistances, where the breakout point of the long-term downtrend is about $40 per barrel. In our viewpoint, a crude oil rally above this level is unsustainable in light of decelerating U.S. and global economic growth.

WTIC Technical Chart

Oil Prices to Stay Low - Jeffrey Currie, Goldman Sachs' head of commodities research, issued a report on Tuesday saying that the recent rally in commodities is just a "mirage", "premature" and "not sustainable," according to MarketWatch. As Mr. Currie put it in his report,

Energy needs lower prices to maintain financial stress to finish the rebalancing process; otherwise, an oil price rally will prove self-defeating as it did last spring,

A dark cloud over the U.S. and global economies is on the horizon, as the China economic slowdown continues and some hawkish Fed members seem to be maintaining their plans for aggressive rate hikes. According to Bloomberg, Willem Buiter, Chief Economist at Citigroup, sent out a note to their clients late last month to get ready for a global recession.

The most recent deterioration in the global outlook is due to a moderate worsening in the prospects for the advanced economies, a large increase in the uncertainty about the advanced economies' outlook (notably for the U.S.) and a tightening in financial conditions everywhere," said Buiter in his note.

Lower demand for crude

This article was written by

Ed Wijaranakula profile picture
W. (Ed) Wijaranakula has been a portfolio manager for over 15 years. He has a Ph.D. in Electronic Materials and has worked with Intel, Taiwan Semiconductor, Texas Instruments, and other tech companies in the Silicon Valley, during his professional career. He was also involved with industry research projects at MIT, NC State and the University of Washington. His investment research expertise includes biotech, commodities and currencies. He has published over 800 articles and holds 14 U.S. and international patents. Tweeter @wijaranakula

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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