Crude Oil Price Forecast: Back into the Symmetrical Triangle – What’s Next?

Crude Oil Outlook:

• Crude oil prices washed out towards $94/brl last week, a floor under the market ever since Russia invaded Ukraine at the end of February.
• Technical damage has been done, but the fundamentals haven’t changed: supply shortfalls are competing with global recession concerns.
• According to the IG Client Sentiment Index, crude oil prices have a bearish bias in the near-term.

Slowdown versus Supply

Global energy markets continue to experience volatility as market participants weigh competing interests: the growing odds of a widespread economic slowdown across developed economies versus a lack of improvement in energy supplies in the near-term. The net-result has been a wash, with crude oil prices holding around $105.00/brl, a level touched for four consecutive weeks. The overarching thesis remains: “the global economy remains undersupplied on the energy front, and no amount of monetary tightening can fix global supply chains upended by Russia’s invasion of Ukraine or China’s zero-COVID strategy.”

Oil Volatility, Oil Price Correlation Remains Weak

Crude oil prices have a relationship with volatility like most other asset classes, especially those that have 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 around cash flows, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. Stability in oil volatility amid a washout then rebound in crude oil prices has left correlations mostly 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 the Cboe’s gold volatility ETF, OVX, which tracks the 1-month implied volatility of oil as derived from the USO option chain) was trading at 54.28 at the time this report was written, 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. One week ago, on July 5, 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 prices remain below the rising trendline from the December 2021, April 2022, and May 2022 lows, but have clawed their way back into the symmetrical triangle in place since the end of February. Technical damage has been done, but not enough to suggest that bullish outcomes are still unlikely. Crude oil prices are back above their daily 5- and 8-EMAs, but below their daily 13- and 21-EMAs; the EMA envelope remains in bearish sequential order. Daily MACD continues to decline while below its signal line, but daily Slow Stochastics have started to climb back towards their median line. Momentum is starting to turn the corner, but not enough to suggest that a workable low has been established.

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

On the weekly timeframe, momentum continues to cool. Crude oil prices are below their weekly 4- and 8-EMAs, but remain above their weekly 13-EMA. The weekly EMA envelope is in neither bearish nor bullish sequential order. Weekly MACD continues to decline while well-above its signal line, and weekly Slow Stochastics are holding around their median line. As was the case in late-June, “if a failed bearish breakout did indeed transpire, the weekly timeframe may not reflect such a development; paying attention to 4-hour and daily timeframes is logical.”

IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (July 11, 2022) (CHART 4)

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

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil – US Crude price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Strategist