Crude Oil Outlook:
- Crude oil prices continue to flirt with the downtrend that dates back to an all-time high, not yet able to escape its gravitational pull. But they are getting closer to triangular resistance, which, if broken, indicates new annual highs.
- Earlier this week Austrian Finance Minister Alexander Schallenberg said “some important issues are still open and unresolved” regarding the restoration of the JCPOA.
- According to IG Client Sentiment Index, crude oil prices have a short-term bullish bias.
Crude oil price near the top of the triangle
Crude oil prices have seen some cutoff in recent days, but nothing new beyond what has been normal trading conditions in recent weeks: consolidating into a symmetrical triangle, while trying to maintain a move at- above the descending trendline of the highs of July 2008 (all-time high) and June 2014.
In this context, recurring information on the US-Iranian negotiations around the JCPOA has proved to be a focal point, as an agreement could lead to a significant inflow of Iranian oil into the global supply, thus upsetting the supply. delicate. – demand imbalance on which OPEC + is working. But barely two days agoAustrian Finance Minister Alexander Schallenberg said “some important issues remain open and unresolved” when it comes to restoring the JCPOA – so an agreement is not about to arrive.
The relationship between oil volatility and oil prices remains normal
Crude oil prices relate to 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 increased volatility – signaling greater uncertainty about cash flow, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility.
Increased uncertainty in financial markets due to increased macroeconomic tensions decreases theoretical demand for energy; signs that the global economy is recoveringrcoronavirus pandemic reduces uncertainty, and therefore, volatility.
OVX technical analysis (oil volatility): daily price chart (May 2020 to May 2021) (Chart 1)
Oil volatility (as measured by the Cboe Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility derived from the USO options chain) closed during the week at 35.58. Oil volatility continues to persist around levels known since 2019. Looking at the futures curve, stability also remains in sight.
With oil volatility moving sideways and crude oil prices oscillating, the correlations we are monitoring remain “normal” (above -0.50). The 5-day correlation between the OVX and crude oil prices is -0.95 while the correlation at 20 days is -0.68; and a week ago the May 18 the 5-day correlation was -0.72 and the correlation at 20 days was -0.61.
Technical analysis of crude oil price: daily chart (December 2020 to May 2021) (Chart 2)
Crude oil prices continue to move towards what appears to be a symmetrical triangle over the daily period – and they continue to gravitate towards both the 2020 high (65.65) and the descending trendline of the highs of July 2008 and June 2014. It should be noted that the aforementioned trendline from historic highs recently served as pullback support – a slight but significant change in behavior.
Crude oil prices are above their daily envelope of 5, 8, 13 and 21 EMA, which is in a bullish sequential order. The Daily MACD is starting to rise above its signal line, while the Daily Slow Stochastics have rapidly accelerated into overbought territory. The momentum is slowly shifting to a more optimistic stance. The possibility of a bullish breakout remains.
Technical analysis of the price of crude oil: weekly chart (December 2007 to May 2021) (Chart 3)
In the previous crude oil price forecast, it was noted that “the weekly long wicks indicate strong market demand just at the weekly 13-EMA, which is actually a moving average of the last quarter of the year. ‘Price Action… The Weekly 13- EMA held support until April, and now crude oil prices are again in decisive territory at the multi-year downtrend line from historic highs. “Holding in decisive territory, improvements in the technical structure over shorter time frames suggest that an escape attempt may soon emerge.
IG CUSTOMER FEELING INDEX: CRUDE OIL PRICE FORECAST (May 25, 2021) (CHART 4)
Oil – US Crude: Retail trader data shows that 42.54% of traders are net long with a short to long ratio of 1.35 to 1. The number of net long traders is 25.89% lower than that of US crude oil. ‘yesterday and 4.99% lower than last week, while the number of net-short traders is 27.55% higher than yesterday and 3.12% higher than last week.
We generally take a vexing view of crowd sentiment, and the fact that traders are net-short suggests that US oil and crude prices may continue to rise.
Traders are even sharper-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a bullish countercurrent in oil – US crude trading.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist