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WEEK AHEAD: JUNE 07

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The price of oil just broke out to its highest in 2 ½ years so I discuss whether this is an opportunity to jump onboard the uptrend. This week we see lots of CPI and GDP data released, so I’ll tie that in when I run through the economic calendar. Thanks! Rich

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Oil breakout, Exxon & CPI data | WEEK AHEAD

 

Hi everyone, the price of oil just broke out to its highest in 2 ½ years so I want to discuss whether this is an opportunity to jump onboard the uptrend - or a time to prepare for the next pullback. This week we see lots of CPI and GDP data released, so I’ll tie that in when I run through the economic calendar.

Early in the week we get GDP data out of Europe and Japan, which I think goes a long way towards explaining why we haven’t seen more weakness in the US dollar. Forex traders are overall bearish on the greenback for reasons I discuss all the time. But I think the source of some of the hesitancy is the sluggish growth performance outside of the US. I.e. you don’t tend to want to buy the euro or the yen when European and Japanese economies are doing worse than the US.

The other data highlights I’d point to are the inflation stats out of the US and China. The previous reading on US CPI hit a big 4.2% and more recently, the Federal Reserve’s preferred measure of inflation struck its highest since 1992. The Fed is forecasting that the inflation is temporary so everybody’s watching this data to see if that is true. If the inflation continues, we can probably expect more upside in oil as well as gold and silver.

As far as the oil price, we’re in the early stages of a possible long-term breakout. On the weekly Brent crude chart, the price has moved beyond resistance near 71 dollars per barrel. The last time it broke out after a consolidation near $46 it went on a multi-month uptrend. The WTI chart looks similar with a move through resistance around 67 dollars. In both cases, if the breakout holds, it implies a re-test of the 2018 highs at 86 and 76 respectively. 

As we know, oil prices are a symptom of supply and demand. As economies reopen following the pandemic and international travel resumes, demand for oil is increasing. This is why the price of oil tends to rise alongside rising growth and inflation expectations – which is what we are seeing at the moment in a big way. Now where this can become a bearish thing for oil is when growth expectations get too high and the data doesn’t live up to it. We’ve seen a little bit of this already from disappointing non-farm payrolls. 

On the supply side, OPEC and its allies are gradually increasing their production quotas and at the same time the US rig count is rising – showing that independent US oil companies are starting to produce oil again as prices rise. Rising supply to meet demand doesn’t need to be bearish – it’s only when the supply swamps the demand that it becomes a problem.

I think probably the most interesting thing that’s going on in the oil patch – is the boardroom shuffle at Exxon. The activist hedge fund ‘Engine Number 1’ has replaced 3 of Exxon’s board members after shareholder support from the likes of Blackrock. The purpose is to force Exxon to speed up its switch to renewable energy and away from carbon-producing oil and gas. Of course, if Exxon – and other major oil companies are going green – that means they are investing less in new oil projects – which ultimately means less supply of oil. It’s probably not a coincidence that the breakout in the oil price is happening alongside what’s happening at Exxon.

Right thanks everyone, good luck trading this week and make sure to click on subscribe so you don’t miss the next episode of the week ahead.
 

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