Aside from weakness in January and February, 2016 has been a good year so far for oil, returning over 21 percent year to date. The strength of the oil rally, has taken other commodities with it. For example, gold and silver, among others, are up over 25 percent and 42 percent respectively. That certainly outpaced anything we have seen in the broader equity markets and speaks to the extent to which temporary oversupply had disrupted commodity markets through 2014 and 2015.

Since hitting $50 in the second quarter however, crude has shown signs of weakness as more producers eye production increases in light of higher prices. This trend was fairly easy to see when oil hit the $50 mark since much of the tail end of the speculative rally was the result of temporary supply disruptions.

Indeed, along this line of thinking, as the rally approached $50 a favorite indicator of ours in terms of industrial demand, the commodity Research Bureau Raw Industrial Index, flattened out, indicating that industrial buyers did not seem to push the rally any higher. With the added pressure of new drills available to come online from producers that sat out while prices dipped below $40 the last time, it became a question of when, not if, the oil rally would settle.

The big question now is where we will go from here. The trend seems to suggest that producers are becoming more optimistic about their prospects at these price levels, and are thus beginning to start up operations again. The Baker Hughes U.S. Rig Count Survey which measures the number of active US domestic oil wells has been rising, though in small increments, every week except one since the beginning of June. While the count is still well below last year's level, it is the trend that could keep pressure on the price of oil.

Another major downward pressure on oil has been macro risk. Indeed the final shock to the summer rally in oil was the unexpected Brexit vote which many had expected would be a win for the “remain” side. With the Brexit vote, the final champions of the day oil speculators, anticipating a slowdown in economic activity in the region, sold off oil along with other major equity indexes. Even as the S&P rallied, however, oil remains fairly weak, as concerns of reduced demand overhangs the market.

The demand side, meanwhile, is looking fairly robust. Recent economic data from the U.S. suggest a fairly healthy economy with particular strength in the retail and housing numbers. Manufacturing, which had been a laggard for much of 2016, is also beginning to show signs of life. All together the U.S. economy seems to show enough strength to suggest an increase in oil consumption.

The biggest risk from the domestic economy at this point is the Fed, which will hold its next policy-setting meeting next week. While there’s very little chance that the Fed would raise rates at the upcoming meeting, market participants will pay very close attention to language changes in the policy statements and commentaries from top Fed officials for hints whether recent economic developments the decision makers’ outlook has changed.

Although the Fed would like to be able to continue to raise interest rates—because it would mean that the U.S. economy is on sure footing—but the economic backup has been mixed. The positive economic trends mentioned above notwithstanding, hiring activity has been tepid and inflation low. With the Fed's dual mandate to manage prices and employment, we cannot expect rising rates until both of those indices see an improvement. Additionally with the US presidential election in November the Fed is essentially working with a compressed timeline, unlikely to make any drastic moves before November 4th.

Going forward it is difficult to predict how far oil will fall, but the short-term trends do not seem very favorable at the moment. But a retreat into the depths of earlier this year (below $30) is quite unlikely. With rig counts so far below last year's levels and the EIA's Crude Oil stockpiles change showing 9 straight weeks of declines; we should hope that the market does not overreact too much. In those times that it does, however, gold and other hedge assets will likely outshine.