It has been a wrenching month to hold energy stocks with the dollar rising steadily in August and in September, pushing commodity prices down. Gold has fallen from $1320 to as far as $1183. West Texas Intermediate has fallen from $100 a barrel to $86.50 at the time of this report. What’s more, there has been no relief rally to sell into. The dollar has risen in parabolic form, much like in 2009, 2010, 2012, and 2013. Below is a chart that shows these events, and how they have been one-off events that lasted for a short spell. The recent two-month push in the dollar has peaked in momentum and is already showing signs of ending with a 14-day RSI dropping to 56 from in the 80s.
What’s more, looking at the dollar on a weekly basis shows that we are leaving an overbought condition that has only been experienced three times in the last 10 years.
Most of the strength in the dollar has resulted from the diverging central bank policies between the U.S. and foreign banks. While the European Central Bank (ECB) has begun a renewed course of policy accommodation starting in June, our central bank is finishing off its asset purchases and debating the initial rate hikes. What’s more interesting is that the U.S. dollar didn’t begin its recent climb until a month later in July. Fed minutes and policy statements as well as strong employment figures have been the main catalysts for the dollar.
Wednesday’s minutes for the Fed’s September meeting lifted stocks in the best rally in three years when the minutes detailed members of the FOMC were concerned about further appreciation of the dollar and the persistent shortfall of economic growth and inflation in Europe.
While the dollar has been dropping over the last few days, crude is one of the few commodities that is not responding well. Ever since we broke a barrel convincingly on October 3rd, the next support is and that appears to be where the traders are taking it.
From a technical standpoint, crude looks due for a rally as we’ve entered into the support zone of . The correction has retraced 100% of the 2014 bullish run. We are already noting other commodities have begun to rally in agriculture and in metals, which have had similar moves down to support. We’re also noting that natural gas has not followed in the carnage seen in crude trading. Natural gas continues to base and trade between 3.80 and 4.15. I’ll be watching these two levels very closely for a new signal for a buy or sell in the near-term. I truly believe 2015 and 2016 will be about natural gas, not due to weather, but due to plans for the U.S. to eventually export natural gas to our friends overseas in Japan and in Europe.
It’s been said that crude isn’t falling due to the dollar, but as a result of higher supply from shale. Recent rig count data from Baker Hughes would suggest the more rigs, the more oil we should have. Independent data from the EIA shows that isn’t the case as US inventory data shows that while elevated from 2001, the last three years of inventory have been fairly constant under 1,100,000 mbbl. Over the last few months, crude inventories have fallen, with the price.
One of the signs I look for is capitulation, which I believe we are starting to see with volume indicators this week. There has been a volume crescendo in many of the oil ETFs like in the OIH, which shows here that the bulls are trying to take back control.
And also in the XOP:
Is this the bottom? It may not be a long-term bottom. Those take time and price. A floor must be well established before a trend can reverse. I do, however, think we’ll be looking at a meaningful bottom due to oversold conditions, volume, and a dollar that is due for a pullback. As I mentioned on the radio show last weekend, I believe we’ve seen the momentum top in the dollar. It may attempt to hit one more high on less momentum and that would be the second indicator to me that the dollar is due for an intermediate top. While I believe the dollar is due for a correction, it is clear that the technical and fundamental factors contributing to the recent move are here to stay while our central bank removes accommodation and our economy remains the best house in a bad neighborhood. Long-term, commodities will likely not be the best place to invest until global economic conditions improve substantially from where they are today.
