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Fundamental Forecast for <USOIL>: Bullish

Fundamental Crude Oil Price Talking Points:

  • The ONE Thing: Crude is looking at the second week of losses after four-year highs were traded at earlier this week and massive inventory gains in the US look to show demand may be waningalongside a miss in Chinese GDP data.
  • Does two make a trend? For the second week EIA US inventories showed a surprise build of +6.49mn vs +0.909mn expected. Oil bulls hoped that last week's mega inventory build would retrace this week after API data reported a surprise draw of -2.13mn barrels on back of last week’s report which reported the biggest build in over a year, 10mn bpd.
  • Contango is back on the prompt and 2nd-month futures contract that may show a combination of surplus inventories and waning demand, which is being blamed in part of the oil’s turn lower.
  • Per BHI, U.S. total rig count rose 4 rigs to 1067 from 1063; US Oil rigs jumps 4 rigs to 873
  • The technical picture: WTI has pulled back within a bullish channel, and Momentum studies like MACD (5, 34, 5)are showing a pullback similar to previous trend resumptions. Traders should look for a break through the bottom of the channel (~$64/bbl) to see that the current bullish environment has terminated.

Crude has been on a bumpy ride since late May, but ultimately, it looks to be moving higher with fundamental tectonic plates potentially shifting. Traders are looking to conflicting forces that show short-term fear of further downside volatility while the possible forces remain for much more aggressive upside potential.

First, the concerns. Crude in the first two months (November 18 –December 18) is now showing a discount developing in the front-month contract compared to the second-month contract whereas in early July, the premium for the front-month contract was as high as $2.57/bbl. Just this week, we’ve seen a discount develop on the back of massive builds in US Crude Oil inventory to the tune of 6.49mln barrels.

In addition to increased inventory in the US that may be showing demand is waning, traders are concerned that a tightening Fed will hurt demand while trade wars may have impacted Chinese GDP overnight that missed expectations when it came in at 6.5% vs. 6.6% and signs are emerging that Saudi Arabia is increasing production to more than makeup for pending Iranian sanctions and depleting in Venezuela.

Don’t count the oil bulls out just yet. Action in the options pits showed a jump in volume of Brent call options that would pay out if the global benchmark were to rise by $70 at expiry in January to trade at $150/bbl. While some would say this is absurd, and such a move would naturally knock the global economy off any horse that it is currently riding on (as we say in Texas,) it’s also worth noting that this is a calculated bet.

The argument for this coming into play likely plays off the threat from Saudi Arabia, the de facto head of OPEC that they would weaponize their oil supply that the world relies upon.

While concerns remain about US monetary policy, global economic growth, and now crude oil supply, the historical pattern of rotational leadership in capital markets tends to see commodities lead the final charge before a recession takes place as inflationary concerns and growth see its final light of day. If that holds true, on Thursday, JPMorgan noted that they see more than a 60% chance that the US will tip into a recession over the next 24-months based on a slew of macroeconomic data.

If this proves true, a recession is nigh, and the historical patterns of market rotations holds that bonds continue to fall (yields higher), stocks have lost their luster (they likely should if growth concerns are valid and seniority claims favor debt holders,) then we may yet to see crude’s top, and that is without the potential negative supply shocks of oil wars developing between Saudi and US, the two global oil supplier superpower.

Despite the Impressive Sharp Pullback, WTI Trails a Familiar Path

Crude Oil Joins Macro Headlines For Busy October As Stockpiles Build

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

WTI crude seems to be trading within a well-defined rising channel as visualized by Andrew’s Pitchfork that is drawn off key pivots in 2015-2016. Technical traders may appreciate that the range between the quadrants of the Andrew’s Pitchfork shown above is $8.75/bbl. The price for WTI crude does not hold perfectly within the ranges, but does appear to honour the ranges, and continues to do so, which currently sits between $65 and $73.25.

Over the years, I’ve learned to look for common patterns that the market trades within, and what behaviour price action exhibits as bullish and bearish headlines fly at crude oil.

As mentioned at the top, the price has traded lower toward the median line that has held price up since Q2 2018 while MACD (5, 34, and 5) looks to show a possible buying opportunity as every dip to negative territory on MACD has preceded a break toward the top of the range that is currently near $73 with the upper parallel line at ~$82.5.

Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here

Traders should look to higher support levels of $66.75/bbl and $64.90/bbl, the lower which is highlighted on the chart above as possible checkpoints for a bullish trend resumption.

Only a break below both of these zones would argue that risk sentiment may be too much for the crude bulls to withstand for now, and traders may want to confirm such an assumption against gold, which would likely be moving toward $1,250 on such a development of risk-off spreading unless the US Dollar has become a weapon of strength again.

Next Week’s Data Points That May Affect Energy Markets:

The fundamental focal points for the energy market next week:

  • Sunday: OPEC Board of Governors meeting, Vienna, 1st day of 3
  • Tuesday: Saudi Arabia hosts the Future Investment Initiative conference in Riyadh, known as “Davos in the Desert, “with Energy Minister Khalid Al-Falih and Saudi Aramco CEO AminNasser among speakers, 1st day of 3
  • Traders should be on watch for geopolitical headlines as many expected attendees pulled out in the last week
  • Tuesday 23:00 ET: China releasescommodity & energy trade data
  • Tuesday 16:30 ET: API issues weekly US oil inventory report
  • Tuesday 22:00 ET: Wood Mackenzie to hold webinar on impact of IMO 2020 rules
  • Wednesday 10:30 ET: EIA weekly U.S. oil inventory report
  • Thursday: Meeting of the IMO’s Marine Environment Protection Committee in London. The key point will be the likely implementation, of a ban on the carriage of high-sulfurfuel, 1st day of 2
  • Thursday: International Energy Agency publishes World Energy Outlookchapter on Oil Producers’ Economies
  • Friday 13:00 ET: Baker-Hughes Rig Count
  • Friday 15:30 ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as trading educational resources. Read more of Tyler’s Technical reports via his bio page.

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Other Weekly Fundamental Forecast:

Australian Dollar Forecast – AUD Price at Risk to Political Uncertainty, Fed Bets, BoC Rate Hike