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Oil in search of a bears' pain threshold

9 June 2021

The stock and currency markets have been weak since the beginning of the week, with little major reason to move in any direction. Active players on stock and FX markets pause to assess the situation, but Oil continues climbing. Over the last two weeks, oil prices have been rising gently, which is a very interesting dynamic. The price of a barrel of Brent and WTI has surpassed $70, an important psychological and technical milestone. Current levels, near $70.30, were last traded in October 2018 for US WTI. Brent has peaked higher as its price jumped briefly to $75 in 2019 after a drone attack on the Saudi Arabian oil refinery.

However, over the last days, we did not see any signs of the bears’ submission, i.e., short-squeeze, or, vice versa, a loosening of the bulls’ grip with new highs. Instead, gentle buying on intraday declines is pushing Oil higher day by day as if the bulls are trying to find the pain threshold level that a bull surrender would follow, with bears then betting on a fall in crude prices.

What is even more surprising is the sluggishness of related instruments. For example, the USDCAD found itself locked in a tight range, running into solid support near 1.2000. And the Canadian dollar cheered the latest oil momentum with a step-down, trading above 1.2100 at the time of writing.

The currency market is deeper and more liquid, so we perceive a halt in the USDCAD decline with caution: it is quite possible that in Oil, we will see a loss of growth momentum near $75 per barrel Brent as well. The big players want to find the short-squeeze area. However, thanks to the corrective pullback in March, the overbought zone and pain threshold has shifted higher. The currency market dynamics make one wary of the potential for a rally in Oil and a retreat in the dollar. Patient traders might want to wait for a spike in Oil volatility before taking short-term selling positions.


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