WTI and DXY breaking the rules, investors wait to see if correlation can last

WTI could be headed for the psychological 72 handle.
WTI and DXY correlating, breaking the rules.

There is an interesting development occurring between the dollar and the price of oil. Both markets are rallying, a dynamic that has only occurred 11 times since 1983.

Despite a fallout in commodities elsewhere while the dollar advances in the 90's, crude has also risen from the low 60's to current highs on the 71 handle. Historically, crude oil prices have had an inverse correlation to the dollar. Over the last four weeks, though, the US Dollar Index has seen a pretty sizable bounce of over 3%, but rather than stop the rally in its tracks, crude oil has been unfazed, gaining an additional 10%+.

Funda-oil/DXY

Fundamentally, though, it makes sense. The dollar is higher as the reflation trade is unwinding where a synchronisation of global growth has broken down in recent weeks and where the divergence between Central Banks exposes higher grounds for the dollar as well. Meanwhile, production curbs instituted by the Organization of the Petroleum Exporting Countries and other major oil producers have been absorbing the glut of crude. Now that Trump has announced the intentions to impose sanctions on Iran, production and supply disruptions should also offer some support for oil and only time will tell if the historical inverse relationship to the dollar and oil will return in due course.

EIA supplies decreased

Earlier, WTI was higher on the back of the EIA reported US crude oil supplies decreased more than initially estimated by 2.197 mbpd during the week ended on May 4. Weekly Distillate Stocks dropped by 3.791 mbpd and Gasoline inventories went down by 2.174 mbpd, both readings also bettering prior surveys. Supplies at Cushing increased by 1.388 mbpd, adding to last week’s 0.416 mbpd build.

WTI levels

At the moment the barrel of WTI is up 1.39% at $71.11 with 2018 high located at 71.28 before the 71.50 and 72.00 psychological levels. 73.20 was the weekly low for nov 2014. On the downside, a break of 68.91 where the 10-day sma is located opens 21-day sma (68.25) before a run down to 66.86 as the May1st low.

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