The US dollar vs. the euro broke $1.49 up channel support Friday that traces back to the euro's steady rise beginning in March of 2009. This uptrend channel also coincides with the pricing pattern of crude, gas and diesel. Does this break in the currency pair signal energy is about to reverse from its uptrend channel?
Should the US dollar continue gaining strength the energy complex would shift to pricing primarily on the fundamentals. With OPEC oil producers selling volumes above agreed upon quotas and non-OPEC producers such as Russia and Venezuela producing at full speed, refiners would need to show a dramatic increase in refinery products utilization rates to avoid a massive oversupply of crude. Refiners are still in hunker down mode with utilization runs under 80%.
In this environment, the crude supply is likely to continue to grow.
Refined products are also well supplied with distillates at a 26 year high and gas hitting 17 year inventory highs. Therefore, should the US dollar continue strengthening, the energy complex is very likely to begin slowly drifting below up channel support seeking a new bottom based on pure fundamentals.
Traders will be monitoring comments from the US Federal Reserve bankers on any shift in policy on target interest rates or monetary easing. The current White House regime will apply pressure on the supposively independent Fed to prevent any change its weak dollar policy. Higher interest rates will create higher costs in funding budget deficits. Knowing this, energy traders will probably not be expecting too much of a drop in crude below its current $75 support handle.
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