Chart of the Week - Crude Oil Cusp
Chart of the Week - Crude Oil Cusp
Crude oil is at a critical point and finds itself at the center of the macro world...
Crude Oil is on the cusp of capitulation.
It’s also closely connected with several key macro/market themes such as recession risk, inflation, and interest rates.
What’s happening?
Crude oil prices have pushed down to the lower end of the range, and are threatening to break a major long-term support level. Sentiment is meanwhile still around 50% bullish, implying that there are still a lot of hold-out bulls that could be caught offside and left scrambling to sell if it does break down.
Why does the oil price matter?
Oil prices and energy —commodities in general for that matter— naturally impact inflation as key inputs in production as well as directly impacting CPI through commodity sensitive consumer products (e.g. gasoline).
They also indirectly tell us things about inflation (and growth) in that commodity prices are influenced by demand and hence the broader macroeconomic cycle, e.g. rising commodity prices often reflect stronger economic conditions.
So lower oil prices are likely to lead to lower inflation through direct effects, but it also speaks to the bigger picture issue of recession risk (which is increasingly coming into focus given the move in the yield curve, unemployment rate, and impending Fed pivot to rate cuts).
What if it doesn’t break down?
Because it’s never as simple as we think, there’s also the chance that crude oil might find a floor here and rally instead. The bull case would be that supply growth remains constrained, the recession risk signals are wrong and growth/demand just ticks along fine (and maybe central bank easing even triggers a growth resurgence).
The other point is that blue bar in the chart below technically can either serve as a diving board or a launch pad. And with sentiment resetting to the bottom end of the range, maybe the bears are the ones in the wrong; speculative futures positioning has dropped substantially after-all. Meanwhile in the background Middle East geopolitics continue to smolder, risking flare-up at any moment.
A sharp and sustained rebound in crude oil could well bring inflation back on the radar, ruin rate cut plans, push bond yields higher, or even bring back that ugly word “stagflation“ (higher inflation + weaker growth).
So I hate to oversimplify it, but I think this might just be *the* one chart to watch for the coming weeks and months with crude oil in the director’s seat for the next act of this macro movie…
Key point: keep a close eye on crude oil for clues on the macro/market path.
REMINDER: fees are going up for new subscribers!
As noted last week, fees for new subscribers are going up to $399/yr (or $55 month-to-month) this week — subscribe now to beat inflation :-)
Topics covered in our latest Weekly Insights Report
Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:
Market Update: checking rotation, risk, rates, FX, commodities
Bond Yield Outlook: comprehensive view of the tactical outlook
Macro-risk Radar: what to keep watch for this week
Monthly Asset Allocation Review: latest edition now out
Latest Views & Ideas: risks/ideas/themes to keep track of
Subscribe now to get instant access to the report so you can check out the details around these themes, as well as gaining access to the full archive of reports.
For more details on the service *check out this recent post* which highlights:
a. What you Get with the service;
b. the Performance of the service (results of ideas and TAA); and
c. What our Clients say about it.
But if you have any other questions on our services definitely get in touch.
Thanks for your interest. Feedback and thoughts welcome.
Sincerely,
Callum Thomas
Head of Research and Founder at Topdown Charts
Follow me on Twitter
Connect on LinkedIn