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Crude Oil Price Forecast: Potential Supply Shocks Back Sharp Rise

Crude Oil Price Forecast: Potential Supply Shocks Back Sharp Rise

2018-04-09 21:00:00
Tyler Yell, CMT, Currency Strategist

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Crude Oil Price Forecast Talking Points:

  • WTI Crude Oil Technical Analysis Strategy: Price sitting > broad $60/bbl support favors upside
  • Crude market drivers look to potential Iran sanctions limiting supply as well as trade wars limiting demand
  • Trader Sentiment Highlight from IG UK: retail short positions collapse by 24% favoring price pressure

Crude Oil bulls took control at the start of the trading week by taking the price of Crude higher by the most in two weeks. A key backdrop of the rise has been the weakening US Dollar as well as the potential that Iran sanctions may be around the corner limiting global supply on the back of US President Donald Trump accusing Russia and Iran in aiding Syria’s president in the most recent gas attacks.

Unlock our Q2 18 forecast to learn what will drive trends for Crude Oil at the open of 2018.

Opposing Force Shocks Keeps Market Bound Between 2018 Extremes

Crude Oil has mainly traded sideways for the majority of 2018 after topping as many risk assets did in late January. The sideways move has developed as opposing fundamental forces appear to be giving both Bulls and Bears ammunition to argue that they’ll win in the end. However, the strength of the recent trend puts the burden of proof on Crude Oil bears.

Three key bearish arguments are the potential supply shock if the trade wars that appear to be on the horizon via tariffs from China and US, the rising rig count due to a flood of US supply as well as the falling long hedge fund positions per the NYMEX. The rig count in the US currently sits at the highest level since 2015 and long positions took the net-long position to the least bullish in three months.

Additionally, crude oil inventories in the Shandong ports of China are on the rise, which argues that a key driver of global demand may be waning.

The Bullish view is in a word, sanctions. The sanctions could potentially be imposed on Iran coming back into effect that could remove a key supplier, OPEC’s third largest at ~12% of total output from the market.

Iran, OPEC’s 3rd largest supplier may have sanctions imposed

Please add a description for the image.

Data Source: Bloomberg

Technical Focus Looks to Price > Ichimoku Cloud, Bullish Momentum

The broad bullish trend on Crude Oil has paused for much of 2018. However, the consolidation has done little to destroy the broader bullish pattern and momentum.

Without a sharp break below $60/bbl (spot at $63.40/bbl), traders should anticipate a resumption to the 2018 high of $66.58, and a potential push higher still beyond $66.58.

Please add a description for the image.

Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

WTI Crude Oil Insight from IG Client Positioning

Crude Oil Price Forecast: Potential Supply Shocks Back Sharp Rise

Insight from IG UK shows us that retail trader data has 49.0% of traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 2.0% higher than yesterday and 11.7% higher from last week, while the number of traders net-short is 11.4% higher than yesterday and 24.0% 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.

Bottom Line: Traders are stuck between a potential supply shock in Iran sanctions potentially being imposed and a demand shock from trade war developments. The broader bias remains bullish given trend and likely weakening of US Dollar continuing.

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

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

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