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Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Christopher Vecchio, CFA, Senior Strategist
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Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Weekly Technical Crude Oil Price Forecast: Neutral

  • Crude oil prices have been on fire in 2021, and in the process of their run higher, have cleared significant technical resistance. Any setbacks – including this week’s sideways price action – should be viewed in this context.
  • Even though crude oil futures are hovering near their 52-week high, net-long positioning is not: the 52-week high in positioning came during the week of April 28, 2020, when 589,388 contracts were held.
  • The IG Client Sentiment Index suggests thatcrude oil prices have a mixed bias in the near-term.

Energy Prices Week in Review

After robust gains through the first two months of the year, and even the first week of March, energy markets took a step backwards as the calendar moved into the middle of the month. Overall, crude oil prices lost -0.73% last week, but are still up by +6.68% in March and +35.22% in 2021 overall. Brent oil prices shed a minimal -0.13%, and remain up by +4.72% in March and +34.64% year-to-date. The laggard of the group, natural gas prices, continued to lag: down by -2.6% during the week; off by -5.34% month-to-date; and gains of +6.15% this year, far below its counterparts.

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Top Economic Events in Week Ahead

The choppy trading conditions last week emerged in the days after the OPEC+ announcement that Saudi Arabia would keep its production cuts in place while allowing Russia and Kazakhstan to increase production modestly. There are no meetings or events that are on the same level of an OPEC+ meeting, which is akin to a Federal Reserve rate decision in the world of energy markets. That said, economic data releases related to energy markets – directly or indirectly – should elicit responses by oil prices.

- Tuesday, March 16: February US retail sales at 12:30 GMT.

- Wednesday, March 17: final February Euroarea inflation rate (CPI) at 10 GMT; February Canada inflation rate (CPI) at 12:30 GMT; Federal Reserve rate decision and press conference at 18 GMT and 18:30 GMT, respectively; 4Q’20 New Zealand growth rate (GDP) at 21:45 GMT.

- Thursday, March 18: February Australia employment change and unemployment rate at 00:30 GMT; Bank of England rate decision at 12 GMT; February Japan inflation rate (CPI) at 23:30 GMT.

- Friday, March 19: Bank of Japan rate decision at 3 GMT.

Read more: FX Week Ahead - Top 5 Events: US Retail Sales; Canada Inflation; BOE & Fed Rate Decisions; Australia Jobs

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Relationship Between Oil Volatility and Oil Prices Normalizing

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.

Heightened uncertainty in financial markets due to increasing macroeconomic tensions decreases theoretical demand for energy; signs that the global economy is recovering from the coronavirus pandemic reduces uncertainty, and thus, volatility.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (March 2020 to March 2021) (Chart 1)

Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Oil volatility (as measured by the Cboe’s oil volatility ETF, OVX, which tracks the 1-month implied volatility of oil as derived from the USO option chain) closed out the week at 37.51. Oil volatility is back at levels seen throughout 2019; the situation has been and appears to be poised to remain stable, as has been the case for most of the past nine-month (discounting volatility leading into the US elections in November).

With oil volatility trading sideways, and crude oil prices in a general uptrend, the correlations we monitor are shifting – the longer-term of which is perhaps normalizing. The 5-day correlation between OVX and crude oil prices is -0.12 while the 20-day correlation is -0.07; and one week ago, on March 5, the 5-day correlation was -0.91 and the 20-day correlation was +0.48.

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Crude Oil Price Technical Analysis: Daily Chart (March 2020 to March 2021) (Chart 2)

Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Crude oil prices continue to trade in an ascending channel that has defined price action since the November 2020 low (incidentally the first trading day of the month). The futures market has broken both the closing high and absolute highs for last year. Choppy trading over the past week has produced a period of giveback in various technical indicators, suggesting that a bull flag is being carved out.

But the structure remains bullish overall. Crude oil prices remain above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line again, while daily Slow Stochastics have started to turn higher just below overbought territory. More gains may be ahead yet.

Crude Oil Price Technical Analysis: Weekly Chart (December 2007 to March 2021) (Chart 3)

Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Crude oil prices have broken the January 2020 high, and in doing so, have overcome the descending trendline from the July 2008 (all-time high) and June 2014 highs. As noted previously, “achieving 65.65 would be a meaningful bullish technical development. A significant bottom may be in place soon for crude oil prices.” These conditions have been met. Any setbacks – including last week’s sideways price action – should be viewed in this context. From this strategist’s perspective, traders should ignore short-term noise and focus on the fact that a multi-decade downtrend has been broken in a meaningful manner.

CRUDE OIL PRICE PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (March 2020 to March 2021) (CHART 4)

Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended March 9, speculators increased their net-long crude oil futures positions to 537,438 contracts, up from the 519,019 net-long contracts held in the week ended March 2. Even though crude oil futures are hovering near their 52-week high, net-long positioning is not: the 52-week high came during the week of April 28, 2020, when 589,388 contracts were held.

IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (March 12, 2021) (CHART 5)

Weekly Technical Crude Oil Price Forecast: Ignore Short-term Noise - A Multi-Decade Downtrend is Broken

Oil - US Crude: Retail trader data shows 47.42% of traders are net-long with the ratio of traders short to long at 1.11 to 1. The number of traders net-long is 11.89% lower than yesterday and 32.10% higher from last week, while the number of traders net-short is 1.77% higher than yesterday and 21.61% 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.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed Oil - US Crude trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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