Crude Oil Outlook:

  • Crude oil prices reached $94/brl last week, a floor below the market since Russia invaded Ukraine in late February.
  • Technical damage has been done, but the fundamentals have not changed: supply shortages are competing with global recession concerns.
  • According to IG Customer Opinion Indexcrude oil prices have a short-term bearish bias.

Slowdown against offer

Global energy markets continue to experience volatility as market participants weigh competing interests: the growing likelihood of a widespread economic slowdown in developed economies versus a lack of improved energy supply short term. The net result was a washout, with crude oil prices hovering around $105.00/brl, a level reached for four straight weeks. The main thesis remains: “The global economy remains undersupplied on the energy front, and no amount of monetary tightening can fix the global supply chains disrupted by Russia’s invasion of Ukraine or Russia’s zero COVID strategy. China”.

Oil volatility, oil price correlation remains low

Crude oil prices have a relationship with volatility like most other asset classes, especially those with real economic uses – other energy assets, soft and hard metals, for example. Similar to how bonds and stocks don’t like the increased volatility – signaling greater uncertainty around cash flow, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. The stability of oil volatility amid a crash and then a rebound in crude oil prices left correlations virtually unchanged, if not still weak.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (July 2021 to July 2022) (Chart 1)

Oil volatility (as measured by Cboe’s Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility derived from the USO options chain) was trading at 54.28 at the time of writing, holding near its highest level since early May. The 5-day correlation between OVX and crude oil prices is -0.38 while the 20-day correlation is -0.82. Oa week ago, the July the 5th, the 5-day correlation was -0.95 and the 20-day correlation was -0.80.

Crude Oil Price Technical Analysis: Daily Chart (July 2021 to July 2022) (Chart 2)

Crude Oil Price Forecast: Back in the Symmetrical Triangle – What Next?

Crude oil prices remain below the rising trend line since the lows of December 2021, April 2022 and May 2022, but have found their way back into the symmetrical triangle in place since late February. Technical damage has been done, but not enough to suggest bullish outcomes are still unlikely. Crude oil prices are back above their daily EMAs of 5 and 8, but below their daily EMAs of 13 and 21; the EMA envelope remains in bearish sequential order. The daily MACD continues to decline below its signal line, but the daily Slow Stochastic has started to rise towards its middle line. Momentum is starting to round the corner, but not enough to suggest a viable bottom has been established.

Crude Oil Price Technical Analysis: Weekly Chart (March 2008 to July 2022) (Chart 3)

Crude Oil Price Forecast: Back in the Symmetrical Triangle – What Next?

On the weekly timeframe, the momentum continues to cool. Crude Oil prices are below their weekly 4- and 8-EMAs, but remain above their weekly 13-EMAs. The weekly EMA envelope is neither in a bearish nor bullish sequential order. The weekly MACD continues to fall well above its signal line, and the weekly slow stochastics hold around their midline. As was the case at the end of June, “if a failed bearish break did indeed occur, the weekly timeframe may not reflect such a development; paying attention to the 4-hour and daily time slots makes sense.


Crude Oil Price Forecast: Back in the Symmetrical Triangle – What Next?

Oil – U.S. Crude: Retail trader data shows 49.20% of traders are net long with a short to long trader ratio of 1.03 to 1. The number of net long traders is 5.78% higher than yesterday and 0.65% higher than last week. , while the number of net-short traders is 1.34% higher than yesterday and 0.49% lower than last week.

We generally take a view contrary to the sentiment of the crowd, and the fact that traders are net short suggests that US crude oil prices may continue to rise.

Still, traders are less net-short than yesterday and compared to last week. Recent shifts in sentiment warn that the current trend in US Oil and Crude prices may soon reverse lower despite traders remaining net short.

— Written by Christopher Vecchio, CFA, Senior Strategist

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