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Crude Oil Price Forecast: Bullish Demand Narrative May Lift Oil Further

Crude Oil Price Forecast: Bullish Demand Narrative May Lift Oil Further

Tyler Yell, CMT, Currency Strategist

Crude Oil Price Forecast Talking Points:

  • WTI Crude Oil Technical Analysis Strategy: Bullish continuation anticipated in a volatile environment
  • Crude has advanced on a weakening fundamental backdrop that could revert higher and life Crude in the process
  • Trader Sentiment Highlight from IG UK: retail short positions trim favoring ST pullback

Supply has taken us this far, can demand carry us the rest of the way in this Bull Market that appears to know no bounds? Since the low in June near $42/bbl, WTI Crude Oil has risen by 61% toward $70/bbl, and the fundamental backdrop looks to favor further strength and rising prices.

Unlock our Q2 18 forecast to learn what will drive trends for Crude Oil in a volatile Q2

US Crude Backwardation Strengthen toward the Spread’s Widest Level

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Data source: Bloomberg

The chart above looks at a calendar spread between the December 2018 futures contract subtracted from the December 2019 futures contract. A positive number shows backwardation where there is a premium to buy know and hold. Because commodities are bought and not sold, this means the environment at hand is one of higher demand relative to anticipated supply, which looks appropriate as OPEC may be set to over-tighten the market.

Demand Looks Rosy As Caterpillar’s Key Industries Show Global Growth

Tuesday offered a new argument for optimism in Caterpillar’s quarterly results that showed faster than expected growth in Construction, mining, oil pumping and railroads. Regarding construction, Caterpillar said that the firm “expects broad-based growth in all regions in 2018, with the biggest drivers being strength for construction activity in North America and infrastructure development in China.” Pertinent to Crude, Caterpillar saw “continued strong demand for reciprocating engines for well servicing and gas compression applications in North America. The current turbines backlog remains healthy in support of the midstream Oil and Gas business." This shows the shale play remains strong and that has been evidenced by the deep discount that Midland Crude has displayed relative to Brent at -$12.62/bbl.

Caterpillar’s results mirror the optimism expressed by the Joint Technical Committee of OPEC who recently declared the global inventory glut as nearly cleared. Another source of ironic optimism for crude traders is that economic releases per the Global Citi Economic Surprise Index hit a two-year low. In other words, a reversion to the mean higher could lift the demand picture for Crude.

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Data source: Bloomberg, Citi

Technical Focus: Price Continues To Follow Script of Tigthening Markets

WTI Crude Oil has a large barrier ahead at $70/bbl, a level not breached since November 2014. However, the backdrop does seem to favor the path of least resistance as pointing higher.

The April opening range low at $61.84/bbl for Crude should be the focal point for Bulls. While it would be difficult to give up recent gains on such a drop, it’s also likely premature to have a naked short above this level given the fundamental backdrop supplied above.

A break and close below $61.84 would open up the possibility of a larger set-back that could retrace toward the YTD low at $57.93/bbl. Short-term support comes from Ichimoku’s Base Line or Conversion (26-day midpoint at $65.69/bbl, which has held up price throughout the 2018 rally. Above $65.59, I’ll favor further upside toward and through $70/bbl.

Chart Watch: Crude Price Continues To Ride Channel Top, Bullish Shocks Still Likely

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

WTI Crude Oil Insight from IG Client Positioning

Insight from IG UK shows us that 39.2% of traders are net-long with the ratio of traders short to long at 1.55 to 1. In fact, traders have remained net-short since Apr 09 when Oil - US Crude traded near 6233.5; price has moved 8.7% higher since then. The number of traders net-long is 8.2% lower than yesterday and 10.4% higher from last week, while the number of traders net-short is 9.6% lower than yesterday and 7.7% 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. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil - US Crude price trend may soon reverse lower despite the fact traders remain net-short (emphasis mine.)

---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 t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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