Crude Oil Posts Record Single Day Rally on US Dollar Weakness, but is Decline Overdon

NYMEX Crude Oil prices ostensibly saw their largest single-day gain in history on US dollar weakness and a broader commodities rally, but a closer look at NYMEX contracts shows that oil’s outsized gains were hardly based on economic fundamentals. Indeed, it seems that illiquidity on the final day of trading for the October crude oil contract allowed major traders to put on a classic short squeeze—sending prices substantially higher on relatively limited buying.

Major news outlets have sounded the alarms on Crude oil’s astounding single-day ascent—blaming US government plans for renewed strength in the previously high-flying NYMEX contract. It is arguable that fears over US government intervention has led to a massive wave of selling in the US dollar and a sharp rally in the dollar-denominated crude oil contract. Yet it is likewise clear that judging the effects of government plans on financial markets is premature to say the least, and it is unclear that we can expect similar US dollar weakness and commodity price strength through upcoming trading. Indeed, our US Dollar forecast suggests that bearish dollar sentiment may be overdone, and we could see the faltering greenback recover against the high-flying euro and other currencies.