Morning Market Overview

Prices are tentatively higher this Tuesday morning.

Oil prices ended last week with modest gains after two weeks of losses. Prices are also higher in a holiday trading session in the US on Monday. Oil prices were pushed lower when global equity markets sold off and the US dollar moved into a short covering rally.

In addition, the fundamental data points were all mostly bearish.  Last week equities started to recover while the US dollar declined providing external support to oil prices. Also, the fundamental data snapshot issued by the EIA last week was supportive in that it showed total combined stocks of crude oil and refined products declined on the week. On the external front the US dollar remains in a broad decline while global equities are now in recovery mode… both supportive for oil prices.

We examined the relationship between oil prices and equities and the direction of the US dollar. The relationship between oil prices and the direction of the US dollar is inversely correlated with the correlation trending toward a larger negative level or simply more correlated. Over the last several weeks there have been many incidents when the 10-day correlation factor was well over the negative 0.80 level or very high inverse relationship…falling US dollar/higher oil prices. The relationship between equity values and oil prices falls into a positive correlation pattern.

That correlation has been trending higher meaning that as equities rise oil prices rise. Over the last few weeks there have been several incidents when the 10-day moving average correlation was hovering around 0.80 or highly correlated. The externals are starting to play a stronger role in the overall direction of oil prices than they were during the first half of 2017. From a short to medium term direction we must not only focus on the weekly fundamental data points for price direction guidance but also the externals.