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WTI Crude Oil Price Forecast: Resilient Trend Struggling Near 11-Month Highs

WTI Crude Oil Price Forecast: Resilient Trend Struggling Near 11-Month Highs

2016-06-10 14:30:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

At the beginning of the year, it seemed nothing was going right for WTI Crude Oil and its buyers. The famous words of BP CEO at the beginning of the year helped to show the sentiment extreme that had built up on the downside where he made the comment that ever “bathtub and swimming pool in America” would be overflowing because there was such significant oversupply.

That narrative has changed and by a good amount.

Today, we’ve seen multiple EIA reports that have shown very large draws of US Oil Inventories and notable depletion of the stock in Cushing, OK. For now, it seems like the few down days we have in WTI Crude Oil are short-term risk-sentiment setbacks where the Dollar rises, albeit still below the critical 12,000 level that we’ve been watching.

Traders are encouraged to continue paying attention to the effect of the US Dollar on the price of Oil. Because Oil is priced in US Dollar globally, a stronger Dollar has a deflationary effect on the price of Oil. This effect was at an extreme in late January when the US Dollar was trading at ~14-year highs. However, as the US Dollar begins to fall back toward 2016 lows, we could continue to see further upside in the commodity market as a whole.

Another key point worth mentioning is what is happening in the options market. In short, it seems that hedge funds and large options traders still favor much more upside. In fact, of the most in-demand options related to Oil right now as per Francisco Blanch, head of commodities research at Bank of America Merrill Lynch in New York is deep out-of-the-money call options, which would only pay out over the coming years if Oil is above $100/bbl.

Now, that’s bullish!

1-Yr Chart of Oil Shows Key Resistance at $51/bbl & $60/bbl

WTI Crude Oil Price Forecast: Resilient Trend Struggling Near 11-Month Highs

Key Support & Resistance Levels from Here (Visual Map Below)

Some traders have been frustrated by the lack of clear “buying opportunities” in WTI Crude Oil with the rally from mid-February. In other words, we’ve seen very few strong pull-backs, but the move higher has been choppy. A choppy move higher typically plays out by new high prices printing only to soon fall back to a multi-day low.

However, another helpful support point since mid-March has been the 21-DMA.

The 21-Day Moving Average, currently at $49.03/bbl has held as loose support for nearly two months now. When a price has come down to this level, we’ve seen a strong bounce and the much-debated uptrend resume.

As of Friday, the price is giving up some of the weekly gains. However, there is still plenty (aside from a near doubling in price from February) for bulls to be encouraged. First, after an impressive EIA number on Wednesday, the price of Crude Oil pushed above the Weekly R2 Pivot, currently at $51.21/bbl. Even with the pullback to the mid-$49 level, the price of WTI Crude Oil is still above the weekly pivot point ($48.86/bbl).

Thursday’s high of $51.64, which is above the Weekly R2 Pivot will remain the resistance in focus for now. However, there was a lot of resistance in the $51/bbl region such as the 100% Fibonacci extension move off the February low and the October 2015 higher. Therefore, to see a pullback is not surprising. Furthermore, if we break above the ~$51 resistance level, a stronger break toward the next key resistance level ~$60 could be underway.

Contrarian System Warns of Further Upside As of 6/10/16

WTI Crude Oil Price Forecast: Resilient Trend Struggling Near 11-Month Highs

In addition to the technical focus around multiple support-zones, we should keep an eye on retail sentiment, which favors more upside price action. Further upside is currently aligned with our Speculative Sentiment Index or SSI for now.

As of Friday, the ratio of long to short positions in the USOil stands at -2.10, as 32% of traders are long. Long positions are 6.1% higher than yesterday and 29.8% above levels seen last week. Short positions are 14.9% lower than yesterday and 10.9% below levels seen last week. Open interest is 9.1% lower than yesterday and 4.7% above its monthly average. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are short gives signal that the USOil may continue higher. The trading crowd has grown less net-short from yesterday and last week. The combination of current sentiment and recent changes could favor a push into support mentioned above at ~$49. A break below there could open up the June Opening Range low of $47.72/bbl.

Key Levels Over the Next 48-hrs As of Friday, June 10, 2016

WTI Crude Oil Price Forecast: Resilient Trend Struggling Near 11-Month Highs

T.Y.

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