Crude Oil Outlook:

  • Crude oil prices fell sharply last week, but a bullish triangle – a continuation effort – persistssuggesting that more upside may be ahead.
  • The fundamentals have not changed: global demand continues to outstrip supply, despite growing concerns about the onset of recessionary conditions.
  • According to IG Customer Opinion Indexcrude oil prices have a short-term mixed bias.

Recession concerns weigh

The Federal Reserve’s June policy meeting was a wake-up call for market participants, who were quick to accept the idea that the only way for central banks to contain inflationary pressures is through demand destruction. . After all, neither the Fed, nor the European Central Bank, nor the Bank of Japan – or any central bank for that matter – can fix the global supply chains disrupted by the Russian invasion of Ukraine or the Zero Strategy. China COVID.

This stark realization last week sent risk appetite plummeting, from equity markets to growth-linked commodities like copper and oil. But those concerns could be exaggerated in the near term, as global energy demand continues to grow – for now – in the face of a lackluster rebound in supplies. OPEC+ countries may not be able to increase production enough to meet projected estimates, and the only viable hope for demand destruction in the coming months is for China to reinstate zero-COVID mandates.

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 recent spike in oil volatility has coincided with a decline in crude oil prices, as is the historical norm.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (June 2021 to June 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 49.19 at the time of writing, almost at a new monthly closing high. The 5-day correlation between OVX and crude oil prices is -0.66 while the 20-day correlation is -0.65. Oa week ago, the June 13, the 5-day correlation was -0.30 and the 20-day correlation was -0.71.

Crude Oil Price Technical Analysis: Daily Chart (October 2020 to June 2022) (Chart 2)

Crude Oil Price Forecast: Despite Pullback, Bullish Triangle Remains - So What?

Crude oil prices fell after hitting their highest levels since early March, eventually falling back below the 100% Fibonacci extension level (114.20) measured from the November 2020 low, the high October 2021 and December 2021. But the technical structure may still be bullish, as a multi-month triangle appears to have formed: resistance is against the March and June highs; and support is off the November 2021, April 2022, and May 2022 lows. Further consolidation may be underway over the next few weeks as price action weaves into the top of the symmetric triangle, which in the context of the previous move, still calls for new cyclical highs in crude oil prices by mid-summer.

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

Crude Oil Price Forecast: Despite Pullback, Bullish Triangle Remains - So What?

On the weekly time frame, the bullish momentum stopped. Crude Oil prices are below their weekly 4-EMA, sitting just at their weekly 8-EMA, and remain above their weekly 13-EMA. The EMA envelope however remains in a bullish sequential order. The weekly MACD started falling from well above its signal line, and the weekly slow stochastics are starting to pull back towards their middle line. Along with the analysis of the daily calendar, the weekly calendar suggests that a period of consolidation may be ahead; the range could be between 107.00 and 122.00 or thereabouts.


Crude Oil Price Forecast: Despite Pullback, Bullish Triangle Remains - So What?

Oil – US Crude: Retail trader data shows 50.85% of traders are net long with a ratio of long to short traders of 1.03 to 1. The number of net long traders is 7.47% higher than yesterday and 27.83% higher than last week. , while the number of net-short traders is 15.61% higher than yesterday and 40.80% lower than last week.

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

Positioning is less net-long than yesterday but net-long since last week. The combination of current sentiment and recent shifts gives us another mixed trading bias for US Oil and Crude.

— Written by Christopher Vecchio, CFA, Senior Strategist

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