Is It Time To Take Profits?

Like many of the higher-risk assets, energy-related markets posted a top at the end of April and started a decline the first few days in May. Without any major events last week, the markets were largely influenced by the strength and direction of the U.S. Dollar.

Commodities such as crude oil react to the movement of the U.S. Dollar because they are dollar-denominated. So when the dollar strengthens, the commodity becomes more expensive to foreign investors. Because of this, a rising dollar often leads to lower demand, which puts downside pressure on the commodity.

On May 3, the U.S. Dollar Index, which measures the U.S. Dollar’s value versus six currencies, fell to its lowest in over 15 months, led by the Japanese Yen’s surge, partly on skepticism about whether Japan policy-makers would intervene to slow its rise.

Thin trading conditions due to a Japanese holiday and position-squaring ahead of Friday’s U.S. Non-Farm Payrolls report helped trigger a short-covering rally by the dollar, helping to put pressure on crude oil prices.

The selling in the crude oil market could’ve been worse if not for speculative buyers taking advantage of wildfires in Canada that have forced several operations in the region to close and escalating Libyan violence that raised worries about immediate oil supplies.

The short-covering was so fierce that Brent oil’s premium over West Texas Intermediate briefly disappeared when the U.S. market…