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Crude Oil Price Pulls Back to Generate RSI Sell Signal

Crude Oil Price Pulls Back to Generate RSI Sell Signal

David Song,
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Crude Oil Price Talking Points

The price of oil attempts to retrace the decline from the start of the week amid an unexpected decline in US inventories, but crude may face a larger pullback as the Relative Strength Index (RSI) falls back from overbought territory to indicate a textbook sell signal.


Crude Oil Price Pulls Back to Generate RSI Sell Signal

The price of oil carves a series of lower highs and lows even as US stockpiles narrow for the second straight week, and crude may face a further decline over the coming days if it fails to defend the opening range for February.

Image of DailyFX Economic Calendar for US

However, the pullback from the monthly high ($93.17) may turn out to be a correction in the broader trend as US inventories contract 4.756M in the week ending February 4 versus forecasts for a 0.369M rise, and indications of stronger demand may keep the price of oil afloat with the Organization of Petroleum Exporting Countries (OPEC) on track to “adjust upward the monthly overall production by 0.4 mb/d for the month of March 2022.”

As a result, the price of oil may continue to exhibit a bullish trend as OPEC and its allies remain in no rush to restore production toward pre-pandemic levels, and it remains to be seen if the group will react to the developments coming out of the US economy as crude output increases for the first time in 2022.

Image of EIA Weekly US Field Production of Crude Oil

A deeper look at the figures from the Energy Information Administration (EIA) shows weekly field production increasing to 11,600K from 11,500K in the week ending January 28, and a further pickup in US output may encourage OPEC and its allies to retain the current production schedule even as the most recent Monthly Oil Market Report (MOMR) emphasizes that “in 2022, world oil demand growth has been kept unchanged at 4.2 mb/d with total global consumption at 100.8 mb/d.”

With that said, current market conditions may keep the price of oil as indications of limited supply are met with expectations for stronger demand, but crude may face a larger pullback over the coming days as the RSI falls back from overbought territory to indicate a textbook sell signal.

Crude Oil Price Daily Chart

Image of Crude Oil Price Daily Chart

Source: Trading View

  • Keep in mind, the price of oil cleared the 2021 high ($85.41) in January, which pushed the Relative Strength Index (RSI) into overbought territory, with crude taking out the October 2014 high ($92.96) earlier this month as it rallied to a fresh yearly high ($93.17).
  • However, lack of momentum to test the Fibonacci overlap around $93.50 (61.8% retracement) to $94.90 (38.2% retracement) has generated a textbook RSI sell as the indicator falls back from overbought territory to push below 70, with a break/close below the $88.10 (23.% expansion) region bringing the monthly low ($86.55) on the radar.
  • Next area of interest comes in around $84.20 (78.6% expansion) to $84.60 (78.6% expansion) followed by the overlap around $78.50 (61.8% expansion) to $79.80 (61.8% expansion).
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.