West Texas Intermediate (USOil) is a specific grade of crude that is used around the world as a benchmark in pricing oil. Normally oil prices fluctuate with global demand cycles for the commodity. This can be seen depicted below as USOil rallied as much as 254% from its 2008 low up to its current 2011 high at $114.80. Price has standing support at $32.40 the October 2011 low, but even after a major multi-year price rally, US Oil has yet to form a new high since July 2008 at $147.27.
These sharp extended moves have made for excellent trend trading opportunities. To see if these prevailing trends can continue, today we will focus on the fundamental factors currently driving US Oil prices.
Oil prices can be a great indicator of global economic growth. As economies boom there is an increased demand for oil to power industry. As well, many finished goods are comprised of the resource. Everything from asphalt to crayons to shampoo use crude in their production. As demand increases for these products, and supply of crude remains flat, it is expected for prices to rise. As growth slows and demand increases the obverse is true. With demand for crude oil decreasing with assumed supply flat we would reasonably expect prices to decline. One way we can monitor this is by keeping an eye on the economic calendar. Specifically, numbers such as GDP, CPI, and employment figures can help us spot expanding or contracting economic conditions.
Similiar to gold, trading a commodity like USOil it is always important to view the denomination that a commodity is traded in. USOil is based in the US Dollar, which means it is quoted in Dollars per barrel. This means the price of crude oil is affected by fluctuations in the USD. Below we see USOil compared to the USDCAD currency pair. This pair was chosen specifically since it includes the USD component mentioned above, along with the CAD. Canada is a world supplier of oil wich means the Canadian Dollar is also influenced by the price of US Oil. Depicted below we can see that when compared the two assets are inversely correlated. This meaning that both assets travel in opposing directions. If the USDCAD is heading up, it would be expect for USOil to be trading down.
This information is very useful to traders that have a general fundamental view of the market. If you have an opinion on crude prices you can clearly also trade the USDCAD. Often traders that are bullish on US Oil prices choose to sell the USDCAD. This allows a trader to use the positive interest rate differential on the currency to gain interest while trading their opinion on USOil.
Bellow we can see the current price action on WTI (USOil) using a daily chart. The market has been consolidating between support and resistance with the commodity neither making a new high or new low for over eight months. Currently price is residing at a 78.6% retracement level measured from the October 2011 low toward the March 2012 high. If this level of support holds it is probable that a triangle pattern is forming signaling a potential return toward resistance at $107.75. A break below support would be in line with a bearish global growth outlook, signaling for a further drop in USOil prices.
---Written by Walker England, Trading Instructor
To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.
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