Originally published by AxiTrader
0.91 - that's the 35-day correlation between the euro and the price of WTI oil futures. Brent crude has a lower, but still strong 35-day correlation with the euro of 0.85.
So with the EUR/USD exchange rate up at 1.25 this morning it is no surprise that both oil prices are also higher in US dollar terms.
But the rally is more than that isn't it. After a bit of a swoon this week WTI and Brent are higher, after a survey showed that OPEC is currently running at 138% compliance with its production cut target. That was a tiny bit, just 1%, higher than the data for December. But it underscores the commitment of the cartel, and their Russian partners, to keep a floor under the oil price.
What's interesting about this week's price action so far is that after both Brent and Crude broke down below their recent uptrends they managed to find support despite the uplift in US production data announced by the EIA for last week as well as the government data which showed production topped 10 million barrels a day in November.
That's the first time the US has produced that much oil since the early 1970's.
Against that backdrop, the two-day rally in WTI which has seen it lift around $2.50 a barrel while Brent has lifted around $1.80 a barrel shows the underlying support that still exists in the market.
As Dennis Gartman is want to say, when a market doesn't react to bearish news you know it's a bull market.
Anyway, looking at the chart - I'll use Brent today - it is clear that prices have been trading in a firm uptrend since the middle of last year. There have been periods of consolidation, both sideways and pullbacks, but overall OPEC's strategy has worked in driving prices from the mid-$40's up to a recent high above $71 a barrel.
Many analysts see prices above $70 as unsustainable given the growth of US shale. That remains a risk.
But the recent selloff pulled up above the 38.2% retracement level of the November/January rally so even this smaller uptrend within the broader uptrend remains intact.
A break of the recent high would suggest Brent could climb another $4 to the 138.2% Fibonacci extension.
But while below the recent high the chances grow for a deeper retracement of oil back to this week's lows and the $67.00/40 region. Below there $65 would come into play and if that broke a full retracement of the rally since November could occur.
Coincidentally that level around $61 is also the 38.2% retracement of the overall rally from mid-2017. So I wouldn't write it off as a medium-term target for Brent at some stage this year.
Have a great day's trading.