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Crude oil gains as the US dollar falls, but it still faces a glut

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Crude oil prices increase

Crude oil prices increased by ~2%. The commodity was trading at $46.7 per barrels on January 27, 2015, due to the depreciating US dollar. The PowerShares DB US Dollar Index Bullish ETF (UUP) dropped almost ~0.95% against the basket of currencies.

A weak dollar supports oil prices, since oil is dollar-denominated. However, traders are worried about whether this rise in oil prices will continue because US weekly inventory data is due on Wednesday, January 28, 2015. The previous week’s report showed a huge weekly inventory buildup of 10.1 million barrels per day.

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The oil market is flooded with surplus crude oil. A further increase in inventory could test crude oil to the nearest support levels of $44 per barrel. As oil prices directly affect ETFs like the United States Oil Fund (USO), the PowerShares DB Oil ETF (DBO), the VanEck Vectors Unconventional Oil & Gas ETF (FRAK), the VelocityShares 3X Long Crude ETN (UWTI), and the PowerShares DB Energy Fund (DBE).

Crude oil glut

In a recent meeting, Saudi Arabian oil company CEO Khalid Al-Falih said Saudi Arabia won’t reduce production to balance the current oil glut, even if oil prices go lower. Saudi Arabia expects non-OPEC[1. the Organization of the Petroleum Exporting Countries] countries to contribute to the decline in production to support the rise in prices. Al-Falih also stressed the importance of investments in future oil projects for future oil demand. Saudi Arabia is the largest exporter of crude oil and a member of OPEC.

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The Organization of the Petroleum Exporting Countries (or OPEC) Secretary-General Abdalla El-Badri reported that there are about 1.5 million barrels a day of surplus crude oil. OPEC continues its policy of collective output target of ~30 million barrels per day. Its December 2014 output was ~30.2 million barrels per day. OPEC has produced more than its target for seven months in a row. The US continues its high production, while Russia and Iraq add to the oil glut.

The oil glut has pushed fund managers to increase short positions in WTI crude oil. The commodity futures trading commission, in its recent report, said that the net short positions in WTI crude oil were the highest since September 2010. The same was the case with Brent crude oil. Fund managers have reduced long positions, as per data from ICE Futures Europe.

The increase in short positions reflects a downward pressure on oil prices. The nearest support for oil is at $44 and $42 per barrel.

Bullish news, like supply declines, could push oil to resistance levels of $47 and $49 per barrel. The relative strength index (or RSI) has been in oversold territory for a long time, showing no signs of a rebound. The moving average convergence divergence (or MACD) is below the zero line, which supports negative crude oil price movement in the short term. MACD above the zero line projects upward price movement, while below the zero line projects downward price movement.

In the next part of this series, we’ll provide a technical analysis update for the SPY ETF.

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