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Crude Oil Price Forecast: Trade Optimism Lifts Crude, Volatility Drops

Crude Oil Price Forecast: Trade Optimism Lifts Crude, Volatility Drops

2018-08-28 19:30:00
Tyler Yell, CMT, Currency Strategist
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Crude Oil Price Forecast Talking Points:

  • The ONE Thing: Backwardation remains supported as volatility is dropping. The combination of near-term premiums and less fear are likely adding to the confidence of global investors.
  • Intermarket forces appear supportive for Crude Oil as the US Dollar had its worst week last week since July’s open while bullish NYMEX positioning remains muted despite falling volatility and supportive trade deal details.
  • WTI Crude Oil Technical Analysis Strategy: Crude oil will likely need to clear and close above $70/bbl to draw in institutional buyers who shied away after OPEC began pumping more. The $7 range between $70/bbl and $63/bbl will likely be the key battlegrounds that technical traders will watch to see who holds the upper hand into September.
  • Access our latest Crude Forecast for Q3 2018 here

KEY TECHNICAL LEVELS FOR WTI CRUDE OIL:

  • Resistance: $69.25 – August high
  • Spot: $68.25
  • Support: $63.89– August low

Supporting Factors For Crude Oil Align

A bevy of supportive factors for crude bulls continues to dominate the market. Everything from the EM-crisis that wasn’t (or at least was contained,) to the positive developments of trade deals, to the steady shrinking supply of US oil stockpiles to the rising backwardation on the belief that Iran supply disruption will affect oil in Q4 continue to support the price of crude.

While oil has recently traded to the highest closing level in over two weeks, there remain hurdles that must be overcome, starting with the August high of $69.25/bbl.

Should U.S. stockpiles continue to fall, this barrier may be overcome. Another supporting factor that traders should look for to support higher oil prices is a weakening US Dollar. After Jackson Hole, there is a belief circulating that the end of Federal Reserve interest rate hikes could happen sooner than previously believed as the US Treasury 2/10 year yield spread sits below 20bps.

While volatility is near possible to predict, it’s not difficult to prescribe. We appear to be settled into a low-volatility regime currently that could take money out of bonds and into assets like stocks and commodities, which align with the broader market trends after the risk heart attack of February.

Daily NYMEX WTI – Can Crude Take $70 in September?

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

After a strong pull back from $74/bbl in WTI, Bulls have reason to hope again. In addition to the points above, you can see that the price is trading within a rising channel, with a key support zone at $63/bbl that is highlighted on the chart.

Since trends are typically either advancing or corrective, traders of the technical bend look to starts of prior moves in the direction of the trend, known as impulsive moves as likely places for corrective or counter-trend moves to stop their progress.

A key price point on the chart that traders have looked to is $63. A break below there would make the argument that the 64% return from June 2017 to present may be as good as it gets. However, above $63, traders have reason to believe we’re simply in the midst of another pullback, which could give way to a further advance in the trend, which has re-asserted itself as my preference given the persistence of supportive factors.

Traders May Want To View Pullback in the Shadow of CoT Positions

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Data Source: CFTC, Bloomberg

Crude has seen an impressive drop in long large speculators per the CFTC data. Institutions have reduced their long positions by 26.7% from the high earlier this year, and they have not had such a low net-long position since November. Given the sharp pull-back in long positions, a rush back in by hedge funds could further support the next price advance with a close above $70/bbl being the first.

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.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Talk markets on twitter @ForexYell

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

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