Chart Advisor: Dollar Powering Up

By Brendan McCarty, CMT

1/ Dollar Index Powers Higher

2/ Crude Backing Off

3/ Heating Oil Reversed

4/ Gasoline Prices Roll Over

5/ Natural Gas and Energy

Investopedia is partnering with CMT Association on this newsletter.  The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice. The guest authors, which may sell research to investors, and may trade or hold positions in securities mentioned herein do not represent the views of CMT Association or Investopedia. Please consult a financial advisor for investment recommendations and services.

1/ Dollar Index Powers Higher

The financial market is an intricate web, where certain variables influence the movement of others and relationships between assets are closely examined. One asset pair that has caught my attention since my early days in the industry is the interaction between the Dollar Index and Crude Oil prices. Generally, a strong U.S. Dollar tends to weaken the price of commodities like Crude Oil. While local demand conditions can undoubtedly affect the price, this fundamental relationship aligns with my core perspective on the market. As evidenced by the chart, the U.S. Dollar Index is on an upward trajectory.

So, with the Dollar Index so strong, it is no wonder that the price of Crude has backed off over the past month. But I wonder, is the price of Crude influenced by the price of the Dollar or something else? I think it is a little bit of both. So, what is the other factor? Weather! AccuWeather’s latest release shows that this is expected to be a mild winter, with prices 2-3 degrees warmer on average. If temps are higher, what are the implications?

2/ Crude Backing Off

The recent surge in the Dollar Index aligns with a drop in Crude Oil prices, which had previously seen a sharp increase in September. This reversal took place towards the end of last month and has brought the commodity’s price back to its crucial 65-week moving average. The trading community appears divided over several key influences: geopolitical tensions in the Middle East, current demand conditions for West Texas Intermediate, and the outlook for future demand shaped by weather forecasts.

One factor that provides some support I have been sharing in regards to Bitcoin and the equity markets earlier this week is liquidity. This factor is favorable for Crude oil’s price at the moment, which supports the idea of a bounce. But as I wrote yesterday regarding Bitcoin, liquidity is range bound and if it tightens, it will have a negative effect on crypto – it would also have a negative effect on Crude and energy prices. While liquidity is significant, a bigger factor for me is the direction of heating oil.

3/ Heating Oil Reversed

As the chart shows, Heating oil turned lower before the Dollar surged higher and the crude price fell from its peak. At the time, I started to hear the news of a warmer winter and began to watch the inventory picture from the DOE a bit closer (you can find that data here: https://www.eia.gov/petroleum/supply/weekly/ ).

The inventory picture was favorable for prices but with the arrival of September, the picture has improved and is weighing on prices. While still not at the top of 5-year ranges, the picture is slowly moving that way. Add in warmer weather and things move quickly against Heating oil. My belief in the energy markets for the winter can be summed up best by “so goes heating oil, so goes the market.” Weak fundamentals will weigh on heating oil and drive energy prices lower.

4/ Gasoline Prices Roll Over

One factor I do not usually consider at this time of the year is Gasoline for the price of Crude direction. Still, this week’s chart is too hard to ignore – it has reversed lower into the previous range, arguing that gasoline prices are falling. If gasoline prices continue to fall, this will lead to overall lower energy payments for the average consumer.

Based on this chart, it looks like Gasoline is heading for the $2 level in the wholesale market, arguing for sub $3 at the pump sooner than later for the consumer. This could encourage more travel by the consumer and stronger growth and demand for energy, but I believe it will not be large enough to offset the fall in heating oil demand.

5/ Natural Gas and Energy

The last factor to review in this study is the price of Natural Gas. It has been a tough call for the past year, sitting between $2.50 and $3 before breaking out five weeks ago (coincided with weak crude oil). The contract has climbed to the 65 week MA but I don’t see that extending much unless the weather story changes and global issues on the LNG side return. Natural gas usage will rise no doubt but is heavily influenced by weather. Also, fundamentals for this product are at the upper end of 5 year averages. In all my years of the markets, I have not seen Natural gas extend when this happened prior. Further, if the weather will be warmer, things will worsen.   

So, the point here is simple. On a global scale, crude oil has the Dollar working against it. If the Dollar climbs, this will put downward pressure on Crude. Second, if the weather is indeed warmer this winter, this will create weak demand for Heating oil and Natural gas. This will drag on the energy sector, pushing crude lower, even with geopolitical risks. While the chart currently supports Crude, sitting above the 65 week MA, the factors are lining up against it in the month’s head.

—

Originally posted 27th October 2023