Is the oil rally built on weak foundations

November 8, 2017 09:50 AM

Crude oil remained in the limelight on Wednesday, as it stabilized around $57 on the back of escalating tensions in the Middle East.

Early trading prices initially declined, due to Chinese crude imports dipping to a one year low but escalating tensions in the Middle East kept the bulls on the map. The current price action suggests that bulls have found support in the form of geopolitical risk. While further upside could be on the cards amid the current developments, the shaky foundation behind oil resurgence could still invite bears to make an unwelcome appearance.

While growing optimism over OPEC extending the production cut deal beyond March 2018 also continues to support oil markets, the question is for how long? The ingredients for oil markets to remain depressed are present, especially when considering that OPEC has not only forecasted slower growth in demand for its crude but also predicted that U.S. Shale output will grow faster than expected in the next four years.

Taking a look at the technical picture, WTI cude is unquestionably bullish on the daily charts. There have been consistently higher highs and higher lows, while lagging indicators such as the MACD, point to the upside. Bulls are hungry for $60 and may be able to reach this level if prices can stay above the $53.50 mark. The question everyone is asking is what happens when or if WTI crude hits $60 which is seen as a strong resistance level.

Dollar weighed by possible delay in tax cuts
The growing concern over potential delays to Donald Trump’s tax reform plan has weighed on the Greenback, with the Dollar Index struggling to break above 95.00 as of writing.

It is becoming increasingly clear that the dollar has become sensitive to expectations of Trump moving forward with the tax plan, with any negative news on the developments exposing the currency to downside risks. From a technical standpoint, the Dollar Index has found itself in a range on the daily charts with support at 94.40 and resistance at 95.10. A breakout above 95.10 may encourage a further incline higher towards 95.50. In an alternative scenario, sustained weakness below 94.40 may open a path lower towards 94.00.

Commodity spotlight – Gold
Gold bulls received some support in the form of a weakening dollar on Wednesday, with prices trading around $1,280 as of writing.

The price action since the fourth week of October continues to suggest that the metal is waiting for a catalyst to nudge it back to life. A return of risk aversion sparked by geopolitical tensions or even fading optimism over Trump’s tax reforms could propel Gold back towards $1,300. Alternatively, if the Dollar regains it’s a mojo, then prices could descend back towards $1,267. From a technical standpoint, the yellow metal still remains somewhat bearish on the daily charts, as there have been consistently lower lows and lower highs. $1,280 remains an important resistance level and a failure of prices to close above that level may trigger a decline back towards $1,267 and $1,260.

About the Author

Lukman Otunuga is an FXTM research analyst