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This week has been the tale of two markets. One being driven lower by a gradual shift in the fundamentals to bearish, the other driven higher by the emergence of a surprise shift in a weather pattern. Crude oil has turned bearish while natural gas is set up for perhaps a test of prices not seen in nearly 4 years later this winter.
Sellers continued to pound crude oil prices lower this week with the selling driven by rising supply and worries about lower demand. The markets are trading 20 percent off their October highs, putting them in bear market territory. WTI is in a position to finish the week about 4.1 percent lower, while Brent is down about 2.9 percent for the week.
The main downward pressure is coming from rising supply. U.S. production continues to rise due to improvements in shale drilling, while Saudi Arabia and Russia have raised production to meet the short-fall caused by the sanctions against Iran. However, no one was expecting the U.S. to issue eight exemptions from the sanctions. This added extra supply to the market, accelerating the downside pressure.
Adding further to the downside pressure are expectations of lower demand. The U.S. Dollar continues to be supported by rising U.S. interest rates. This is making the dollar a more attractive asset to the detriment of several emerging market currencies. This is helping to make dollar-denominated crude oil too expensive to foreigners, leading to the drop in demand.