US Crude Under Pressure, Drops to 12-year Lows

US Crude is steady on Monday, as crude futures trade at $31.73 a barrel in the North American session. There is only one US event on the calendar, as the US Labor Market Conditions Index jumped to 2.9 points, its highest reading in 10 months.

Crude oil remains mired in a steep slide. The commodity has plunged 13.8% since the start of the year and has dropped to its lowest level since December 2003. Last week began with investors seeking the safety of the US dollar following weak Chinese manufacturing data which underscored the slowdown affecting the world’s second largest economy. Rising tensions between Saudi Arabia and Iran and a surprise nuclear device test by North Korea further decreased any appetite for risk. The kiwi received another blow after China devalued its currency, the yuan, by over 0.5%.

Oil prices were as high as $115 back in June 2014, but prices have plunged due to a global surplus of oil which far exceeds demand. Oil producers have been unable to reach any agreement on lower production ceilings, as underscored at a December OPEC meeting which ended in stalemate. Instead, oil exporters continue to produce at high levels in a desperate attempt to maintain market share, adopting the mantra of “every man for himself”. The recent flareup in the Persian Gulf in which Saudi Arabia has cut relations with Iran (both members of OPEC) will likely only make matters worse. Will the spiral continue? Experts such as Citigroup’s Ed Morse has stated that there is no end in sight, adding that US oil prices could drop as low as $20 a barrel. Adding to crude oil’s woes is the sharp rise of the US dollar against its rival currencies. In a report published on Monday, Stanley Morgan stated that a 5 percent increase in the value of the dollar against a basket of currencies could push the price of oil down from 10-25 percent, which translates to $8 per barrel.

US employment numbers continue to impress. On Friday, US Nonfarm Payrolls surged to 292 thousand, crushing the estimate of 203 thousand. This was the strongest reading in 10 months, and underscores a strong US employment market. The unemployment rate remained unchanged at 5.0 percent. The positive news continued on Monday, as Labor Market Conditions Index jumped to 2.9 points in December, up from 0.5 points a month earlier. It was the indicator’s best showing since February 2015. The Fed will probably not make another move at its policy meeting at the end of January, so soon after the historic rate hike in December. However, many experts are expecting that the Fed will raise interest rates in March. Such a move would likely make the US dollar assets more attractive to investors and boost the greenback against its rivals. If the US economy continues to heat up, the Fed is expected to continue to tighten monetary policy over the course of 2016.

The Federal Reserve released the minutes of its historic December policy meeting, at which it raised rates by 0.25 percent. The minutes were noteworthy in highlighting differences among policymakers as to whether US inflation levels will improve. Indeed, some FOMC members said that their vote in favor of a rate hike was a close call because of concerns that low inflation levels will continue in 2016. What’s next? The Fed has hinted that the December rate hike was the first of a series of incremental moves in 2016, but inflation levels will play an important role in the timing and size of future rate hikes.

WTI/USD Fundamentals

Monday (Jan. 11)

  • 10:00 US Labor Market Conditions Index. Actual 2.9 points

*Key releases are highlighted in bold

*All release times are EST

WTI/USD for Monday, January 11, 2016

WTI/USD January 11 at 14:00 GMT

WTI/USD  Open: 32.54 Low: 31.63 High: 33.19 Close: 31.73

WTI/USD Technical

S3 S2 S1 R1 R2 R3
22.28 26.64 30.00 32.22 35.09 37.75
  • WTI/USD was flat in the Asian and European sessions. The pair has lost ground in North American trade.
  • 30.00 is providing support
  • There is resistance at 32.22

Further levels in both directions:

  • Below: 30.00, 26.64 and 22.88
  • Above: 32.22, 35.09, 37.75 and 39.87

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Kenny Fisher

Kenny Fisher

Currency Analyst at Market Pulse
Kenny Fisher joined OANDA in 2012 as a Currency Analyst. Kenny writes a daily column about current economic and political developments affecting the major currency pairs, with a focus on fundamental analysis. Kenny began his career in forex at Bendix Foreign Exchange in Toronto, where he worked as a Corporate Account Manager for over seven years.