Oil price falls after US macroeconomic data strengthens Dollar

• Oil price falls as traders take profit and the debt-ceiling impasse continues without a deal in sight.
• The US Dollar continues rallying after US macroeconomic data reinforces an optimisitc view of the economy.
• Oil, however, is supported by EIA inventory data, showing a steep drawdown in the prior week, reflecting rising demand.
• Comments by the Saudi Oil Minister warning short-sellers and the start of the US driving season are bullish factors.   

Oil price rolls over and heads south on Thursday due to continued unease around the debt ceiling and traders booking profits from the recent rally. Crude is mainly priced in the US Dollar which also is getting stronger, putting pressure on the Oil price. The Dollar Index (DXY) has broken above the 104.00 psychological level and is on the rise following the release of positive data. 

At the time of writing, WTI Oil is trading in the lower $71s and Brent Crude Oil in the mid $75s. A bullish right-angled triangle has completed on the 4-hour chart, posing a challenge to the overall bear trend.  

Oil news and market movers 

• A lack of traction in US debt-ceiling talks weighs on the Oil price as it raises the specter of the US defaulting and triggering a global recession.
• The US Dollar catches a bid from a combination of safety flows and greater expectations the Federal Reserve (Fed) will continue to hike rates.
• US macro data remains supportive of the Greenback. Gross Domestic Product Annualised(Q1) was revised up to 1.3% from a 1.1% preliminary estimate. The GDP price index was likewise revised up to 4.2% from 4.0%. Core Personal Consumption Expenditures (QoQ) (Q1) was revised up to 5.0% from 4.9%. 
• Labor market data further supports the US Dollar, after Initial Jobless Claims (May19) came out lower at 229K than the 245K forecast. 
• Energy Information Administration (EIA) inventory data released on Wednesday showed a much larger-than-expected 12.5 million barrel drawdown, indicating robust demand. Analysts’ expectations had been for a 775,000 rise. 
• Oil was supported by comments from Saudi Oil Minister, Prince Abdulaziz bin Salman, who warned Oil speculators to "watch out" and that they might suffer as they did "in April".
• His comments have been taken as warning to short-sellers that the Oil price might rise. 
• Abdulaziz defended OPEC and its decision to cut production by 2 million barrels per day (bpd) at its meeting in October 2022. Given the Oil price is at similar levels to October, it may suggest there is a risk the cartel will announce another supply cut in June. 
• The US Memorial Day weekend kicks off on May 27 and marks the beginning of the US summer driving season, which will provide a seasonal lift to demand, supporting Oil prices. 
• According to a report from the Energy Information Agency (EIA) out Thursday, investment in solar power ($380B) is set to outpace that of Oil ($370B) for the first time in 2023, as countries attempt to meet climate chnage goals of net zero by 2050. 

Crude Oil Technical Analysis: Triangle in downtrend

WTI Oil is in a long-term downtrend from a technical perspective, making successive lower lows. Given the old adage that the trend is your friend, this favors short positions over long positions. WTI Oil is trading below all the major daily Simple Moving Averages (SMA) and all the weekly SMAs except the 200-week, which is at $66.89. 

WTI US Oil: Daily Chart

A right-angled triangle has formed since price recovered from the May 4 YTD lows, as shown by the dotted lines. The initial rebound off the May 4 lows could be a Wave A, with Wave B descending between May 8-15. Wave C rose in the week that followed, before pulling back in a Wave D. The recovery this week is probably a Wave E. Since most triangles are only composed of five waves it is now likely complete. It could break out at any moment. 

There is a chance the triangle might break in either direction, but it is biased to break higher because the top border is flat (it is right-angled). A breakout higher could see price rise in a volatile rally to a potential target in the $79.70s, calculated by using the usual technical method, which is to take 61.8% of the height of the triangle and extrapolate it from the breakout point higher. Oil price could even go as far as a 100% extrapolation in bullish cases, however, the 61.8% level roughly coincides with the 200-day SMA and the main trendline for the bear market, heightening its importance as a key resistance level. 

Assuming Oil price reaches its target, a bullish break would mean price moving above the $76.85 lower high of April 28, thereby, bringing the dominant bear trend into doubt.

The three green bars in a row that represent the rally this week (Wave E) and the tentative breakout that accompanied Wednesday’s rally, are a strong bullish sign. Price could still recover despite the bearish action on Thursday, and eventually continue higher. 

As well as the triangle, the long hammer Japanese candlestick pattern that formed at the May 4 (and year-to-date) lows is a sign that it could be a key strategic bottom. 

Further, the mild bullish convergence between price and the Relative Strength Index (RSI) at the March and May 2023 lows – with price making a lower low in May that is not matched by a lower low in RSI – is a sign that bearish pressure is easing. 

Given the downtrend is dominant, however, there is still also a possibility WTI Oil price could break lower, with a decisive break below the triangle’s lower border, likewise required, and a target at $67.27. This is just above where the 200-week SMA is located and likely to offer support. Traders might even wish to wait for a break below the lows of Wave B at $69.40 for added confirmation.

WTI US Oil: Weekly Chart

A break below the year-to-date (YTD) lows of $64.31 would be required to re-ignite the downtrend, with the next target at around $62.00 where trough lows from 2021 will come into play, followed by support at $57.50.