Crude Oil Price Forecast Talking Points:
- The ONE Thing: Backwardation is rising again, and that’s good news for bulls. The spread between December 2018 and December 2019 has widened in favor of Dec. 18 showing a demand premium that will likely continue to support the bullish argument. The rise came after the largest stockpile drawdown of crude in the US in four weeks per weekly EIA data.
- Iran sanctions remain the elephant in the trading room as to whether or not we could see a massive supply shock in the global oil market. While China is set to side with Iran, the release of the US’ strategic oil reserve could show they’re seeing material effect on the physical market that is aligning with >4% US GDP and <4% US unemployment all of which favor demand staying healthy as a major supplier (OPEC’s 3rd largest) is taken out by sanctions.
- WTI Crude Oil Technical Analysis Strategy: Crude oil is finding solid ground after the large drawdown to the tune of six million barrels may help to support the front-month contract and take the spot price above the 50-DMA and Ichimoku cloud. Access our latest Crude Forecast for Q3 2018 here
Key Technical Levels For Crude Oil Traders:
- Resistance: $69.19 – August high
- Spot: $67.66
- Support: $63.89– August low
The US Remains Thirsty For Black Gold
Source: Bloomberg, DoE
Weekly EIA data showed a bigger-than-expected draw of nearly six million barrels against an expectation of two million barrels making for a bullish read on the weekly inventory report. The US’ strategic petroleum reserve (SPR) was a part of the petroleum report that showed a drawdown of 2.5 million barrels.
Markets are in high demand-season in late-August, but in prior weeks the trade war rhetoric had taken over to make fears of lower global demand the running theme that markets were pricing. WTI & Brent now is only trailing the NASDAQ as the best performing global asset showing it holds a similar resilience as equities despite concerning narratives that continue to float.
Looking to the DOE data on Cushing Oklahoma stockpiles, there has been a 62.5% drop from the late 2017 high of 64.5million barrels to the current 24.2m level. Aggregate supplies per the DOE show a 41 million excluding the SPR down from 47m last September.
Front-Month WTI Premium May Keep Bears Disappointed
Data source: Bloomberg
The chart above shows the premium of the December oil futures contract relative to the December 2019 contract. Should the front-month trade at a discount to later-dated month (it hasn’t since September), bears likely be emboldened. However, the premium through the divided global political scene has kept the front month premium near $3, which would likely limit the downside to crude oil.
Daily NYMEX WTI – Has Crude Found Broad Support At $63
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
There’s been a favorable development in crude via a rally in December 18-December 19 spreads alongside a drop in brent implied volatility that has fallen to the lowest level in 4 weeks all of which is alongside a massive drawdown in US oil supplies.
This trifecta has aligned with a jump higher in Crude for five straight days, and now traders are wondering if we’ll soon see a move back to $70/bbl in WTI. While oil is ~8.5 percent below the three-year high reached in early July, traders have seen strong support near $63, which aligns with the all-important 200-DMA.
Additionally, MACD (5,34,5) may also be showing a basing of bearish momentum while the spot price of crude oil has moved above the bearish channel. Technically, this combination of bearish momentum basing alongside a bullish breakout will now turn focus to $69.19, the August high. A break above here may mean that like stocks, rumors of the death of the current bull market (at least in the US) are greatly exaggerated.
Unlock our Q3 18 forecast to learn what will drive trends for Crude Oil
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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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