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Crude Oil Price Forecast: Supply Shocks May Mount As Florence Strengthens

Crude Oil Price Forecast: Supply Shocks May Mount As Florence Strengthens

Tyler Yell, CMT, Currency Strategist
What's on this page

Crude Oil Price Forecast Talking Points:

  • The ONE Thing: Brent is leading the way higher as WTI is picking up as Florence closes in on the coast of South Carolina.
  • The US Dollar remains a key driver in the world of commodities, but the strength of Brent is helping to show that if the US Dollar wobbles, Crude (and other commodities like Gold) could see a nice recovery or trend recapture.
  • WTI Crude Oil Technical Analysis Strategy: Crude Oil has rallied early in the week off $67/bbl, and the intraday volatility last week that took WTI above $71.20 helps to show that the upside remains the path of least resistance, and that view holds absent a break of $63.90

Key Technical Levels For WTI Crude Oil:

Resistance: $71.17 – September 4 high, the official end of the ‘driving season.’

Spot: $69.13

Support: $63.89– August low

A key story for crude traders that tends to come on the heels of driving season ending is the start of hurricane season. Hurricane Florence is moving fast toward the US East Coast and is set to be the strongest hurricane to hit the Carolinas in nearly 30 years and is expected to make landfall on Thursday or early Friday. Expect weather forecasters to get as much screen time on energy trading desks this week as the EIA inventory and rig data as the storm is expected to cross over a key pipeline to the U. S. North East.

Adding to potential supply worries was a report by the trade group, Oil & Gas UK, the U.K. North Sea is on track this year to have the fewest exploration, appraisal, and development wells since 1973, which is adding to the possibility of supply risk.

What About The Dollar?

Crude has been volatile, but the upside continues to look promising. The focal point on the charts will be the August low of $63.89, but with price trading above this level, we could be seeing a recap of the 2016 September-December volatility that ultimately takes price higher.

Another key factor in crude oil price continues to be the US Dollar. Despite the concern about the Emerging Markets (and concern is warranted,) the US Dollar is hard to blame. Since the aggressive rise in the US Dollar Index that accelerated in April and May, the price hasn’t done much further appreciation.

There is an inverse relationship between the US Dollar and crude oil since crude is priced in the US Dollar, so a strong dollar is a headwind and not a tailwind for Crude. Specifically, the US Dollar Index topped out in late May at 94.60. As of September 11, it is at 94.85 thought it did get as high as 96.60 in mid-August before reversing lower.

It’s too early to call a US Dollar top (or is it?), but if it has topped, it’s fair to say that the crude trend may continue higher with potential shocks to the upside remaining ever-present.

Daily NYMEX WTI –Crude Looking Set to Retake $70 /bbl

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

The price action looks to be supporting the fundamental view as crude continues to trade favorably in the top third of a rising channel. On a long-term technical sense, looking at the 2014-2016 range, 50% of that range is at $67.86, and the price since summer hasn’t held long below this level.

The chart above shows a Fibonacci channel, which is drawn by connecting two lows in an uptrend and the first intermediate peak. This channel gives you a dynamic look at Fibonacci Retracements as price advances in the direction of a trend. Hat tip to Jake Schoenleb for that.

Currently, given the price channel off the 2016 and 2017 lows and the June 2016 high, you can see the current move has remained above the 50% or midpoint of the bullish channel, and now we’re holding above the 38.2% retracement line of the bullish channel.

As for price advances, it’s difficult for me to hold a bearish view with backwardation remaining in place and the price holding above the top half of a bullish channel

A key price point on the chart that traders have looked to is $63. A break below there would make the argument that we’re about to see some strong hands and deep pockets take their profits.

However, above $63, traders have reason to believe we’ve yet to see the post-2016 high in crude.

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.