Crude Oil Price Forecast Talking Points:
- The ONE Thing: Volatility continues to fall in the crude oil market, and traders who look at the charts may continue to favor higher prices as the broader stability in risk sentiment seems to set the stage for a test of $59-$64/bbl. Traders will also look to the 21-DMA at $56.62/bbl to hold to buttress bullish sentiment.
- What’s the risk to the bullish view? Supply more than demand. This week, OPEC challenged the US’ pending legislation on the ability to sue OPEC could lead to a disastrous situation for the US E&Ps.
- What’s a professional crude trader’s view? This podcast with Brynne Kelly is a can’t miss view on oil trading from the platform of the world's largest merchants
You are in luck, DailyFX’s Q1 2019 Crude Oil Forecast was just released
Technical Forecast for USOIL: Bullish
Source: Bloomberg
Volatility is an excellent servant, but a horrible master. When volatility gets out of hand, it rules everything, and understandably, few traders are safe from its wrath as the aggressive drops can be followed by the most aggressive rallies. However, when volatility is low, all seems right in the trader’s world, and that feels like where we are now.
Sure, there is lots to write on in terms of the US-China Trade War, the central bank shift to dovishness, and OPEC and their alliances, known collectively as OPEC+ who will be meeting in Azerbaijan, Algeria to discuss how they can offset the Venezuelan supply shock and continue to stabilize the market.
All of this and more comes together on the chart above. The price of WTI Crude Oil’s front-month oil contract alongside the 3M implied volatility ( a price derived from the Black-Sholes options pricing model) on crude oil shows a clear inverse relationship. As volatility rises, price typically falls or moves without clear directional and fundamental cues, but is subject to flows and position adjustments.
When Volatility is low, and 3-month implied vol is as low today as it was in late October, traders continue to discount the fears. Much of this optimism is due to the view that supply cuts will remain, and traders are placing the highest premium on the December 2019 contract in relation to the December 2020 WTI contract since November.
Looking for a fundamental perspective on crude oil? Check out the Weekly Crude Oil Fundamental Forecast.
A Pullback May Appear, But History Shows Upside May Remain
Chart Source: ProRealTime charting, IG UK Price Feed. Created by Tyler Yell, CMT
The chart above is a good deal more simple than the usual charts I share. However, the message to convey is simple. After bouncing off the lower volatility-band to above the 20-period moving average, crude’s best days are often yet ahead.
However, a pull-back has come over the last three years when such a development has taken shape where price is above the 20-MA after pushing off lower vol-band. Subsequently, the 20-MA on the weekly chart at $53.79/bbl could act as a strong form of support or buying power on any subsequent pullback. Only a break below and failure to trade above the 20-MA on the weekly chart would change the view from bullish to neutral.
Lastly, the upper volatility band (2,20) on the weekly chart sites at $62.59/bbl. Traders may be encouraged enough in that alone, but looking at the past price action, traders will see that price has walked up the upper volatility band after the first touch, which could lead to a price move toward the 11-year trendline near $71/bbl if the above conditions hold.
Could They? Would They? US Antitrust Regulations Could Shatter Global Oil
A familiar tactic of the current administration has reached an unfamiliar target. Trump’s long-held criticism of OPEC is coming to a head as US lawmakers are making a push to allow for the ability to sue OPEC countries to reign in their power oversupply, and therefore, price.
The bill has been given the moniker NOPEC, as in No Oil Producing and Exporting Cartels Act, and it would allow the US’ Department of Justice to sue for antitrust violations for the exercising of their ability to control oil production to affect crude prices.
Traders may remember that a similar bill, which would be an amendment to the 1890 Sherman Antitrust law act that gave us Exxon, Shell and other derivatives of John D. Rockefeller’s Standard Oil passed both the house and Congress before it was vetoed by President George W. Bush in 2007. Trump, however, may appreciate the upper hand it could give him, but OPEC is coming out a warning against the unintended consequences that should send shivers down the spine of anyone tied to the oil industry.
While Trump is likely looking at lower costs of energy for the consumer, OPEC is focusing on the utter destruction that could come upon the flooded market to unprecedented proportions. OPEC’s Secretary General, Mohammed Barkindo noted that such legislation would not serve the US’ interest. Barkindo has warned Wall Street financiers per Bloomberg that should the law go into effect, every country would not unite, and instead produce as much as possible, as soon as possible, and oil would become as cheap as possible.
Why is this a potential US problem? Costs for extraction globally are much lower than shale, and not only put them in a potentially unprofitable situation, but financiers should also be concerned. The billions upon billions of loans provided for extraction and production of US-based energy would likely see high defaults that would cut deep should the market become a free for all.
We’ll see.
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---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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