Crude Oil and The Butterfly Effect

After falling below US$27.00 in the early months of 2016, the price of West Texas Intermediate Crude Oil has since moved steadily higher. Last week, Crude Oil traded to a three year high of US$69.56 per barrel, a move which appears to have caught the attention of U.S President Donald Trump.

President Trump tweeted over the weekend “Oil prices are artificially Very High! No good and will not be accepted!” The timing of the tweet coincided with a meeting of OPEC representatives who were in Saudi Arabia to discuss avenues to limit supply and support oil prices. There is some suggestions that Saudi Arabia would like to see Crude Oil prices return to above US$100 per barrel.

The price of Crude Oil has far reaching tentacles throughout the real economy. From influencing the cost of production and manufacturing, to the cost of purchasing an airline ticket, to purchasing petrol for the family car. Rising Crude Oil prices also contribute to higher inflation. This relationship was perhaps on the mind of bond traders as the U.S 10y Treasury yields surged higher to close the week at year to date highs of 2.95% (chart 1) despite a somewhat softer patch of U.S economic data of late and a fall in equity prices on Friday.

US 10YR interest rates

If you recall it was the rise above 2.65% in US 10y Treasury yields at the end of January/ late February this year that was partially blamed for the recent correction in global equities indices. Based on the links between markets highlighted above it is very important for traders to keep an eye on the price of Crude Oil in coming weeks as well as to have in mind some key upside medium term technical levels for Crude Oil.

As be seen on the monthly Chart below (Chart 2) there is a confluence of major technical resistance levels in the ~ US$72.00 area. (Allowing +/- $2.00 leeway either side).

  • The multi year decline from the US$147.27 high in 2008 to the US$26.05 low in 2016 has a 38.2% Fibonacci retracement at ~US$72.39. (Blue)
  • The decline from the 2011 high of US$114.83 to the US$26.05 low has a 50% Fibonacci retracement at US$71.31. (Pink)
  • The wave equality projection target from the US$26.05 low is ~ US$71.34. (Purple)

Crude oil monthly

Our expectation is that Crude Oil will struggle to break the resistance zone at least on its first attempt. However, if Crude Oil were to break and close much above US$74.00, it has the potential to rally towards U.S$85.00 per barrel. This would likely be the catalyst for U.S 10y Treasury Yields to continue their rally towards 3.25% and also spark greater volatility across FX and Equity markets. Essentially, The Butterfly Effect at work.

Source Tradingview. The figures stated are as of the 23rd of April 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation


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