Crude Oil Price Forecast Overview:
- Crude oil prices have been trapped in a sideways range for the past few weeks, and there’s little reason to expect significant price developments in the near-term.
- The ongoing tug-and-pull between the global economic recovery and the supply-demand deficit has provided stability for energy prices in general.
- Recent changes in retail trader positioning gives us a bullish bias towards crude oil prices.
Crude Oil Prices Swing Higher
Crude oil prices have seen a bit more volatility in recent weeks without any significant price development. The ongoing tug-and-pull between optimism of a global recovery gaining traction amid the coronavirus pandemic and the persistent supply-demand deficit for energy has provided stability for crude oil prices. For many months now, we’ve seen crude oil prices trade between 36.00 and 45.00; there’s little reason to expect this to change.
Sticking to Our Quarterly Forecast
Like at the start of Q3’20, the start of Q4’20 brings about great uncertainty for the global economy and energy markets, particularly as the seasons shift towards colder weather in the developed economic Northern hemisphere. Winter is coming, as it were, and that means that questions will linger around the demand side for energy markets. But the buoy remains: persistent efforts to curate a supply-demand deficit will likely prevent crude oil prices from falling too far.
We thus stick to our fundamental forecast of Q3’20 as we turn the page into Q4’20, having previously called for crude oil prices to stay elevated between $35 and $50 per barrel. The supply-demand shifts are a strong fundamental force that is the dominating market factor. And it still holds that, were crude oil prices to rise beyond $50 per barrel, it would be highly likely that US shale producers would come back online, bring more supply back into the mix.
Oil Volatility Slumps, Oil Prices Inch Higher
Crude oil prices have a relationship with volatility like most other asset classes, especially those that have real economic uses – other energy assets, soft and hard metals, for example. Like how bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. Heightened uncertainty in financial markets due to increasing macroeconomic tensions decreases theoretical demand for energy; signs that the global economy is recovery from the coronavirus pandemic reduces uncertainty, as does hope for a new US fiscal stimulus package.
Read more: How Do Politics and Central Banks Impact FX Markets?
OVX (Oil Volatility) Technical Analysis: Weekly Price Chart (May 2007 to October 2020) (Chart 1)
Oil volatility (as measured by the Cboe’s gold volatility ETF, OVX, which tracks the 1-month implied volatility of oil as derived from the USO option chain) was last spotted trading at 42.86, well off of its all-timeabsolute high set on April 21 at 517.19, and still considerably below the all-time closing high (also established on April 21) at 325.15. Oil volatility is back at levels seen throughout 2019; the situation appears to be stable (as has been the case since June).
The 5-day correlation between OVX and crude oil prices is -0.97 while the 20-day correlation is -0.84; and one week ago, on October 1, the 5-day correlation was -0.90 and the 20-day correlation was -0.93. If it’s typical to see oil volatility and oil prices share an inverse relationship, it would appear that this sense of normalcy is returning: a continued drop in oil volatility may allow for further near-term gains by crude oil prices, even if the scope of a significant recovery remains limited.
Crude Oil Price Technical Analysis: Daily Chart (October 2019 to October 2020) (Chart 2)
On the USOIL CFD contract, the low established during the May WTI contract moving into negative territory was 0. To this end, the Fibonacci retracement taken from the 2020 high at 65.62 to the contract low at 0 suggests that crude oil prices are trading just above the 61.8% retracement (40.56) of the 2020 trading range. Furthermore, crude oil prices are once more challenging the 2018 low at 42.40.
Around these levels, crude oil price momentum has previously moderated. Slow Stochastics are trending higher above their median line while daily MACD is turning higher just below its signal line. The difference between the daily 5-EMA and the daily 21-EMA remains less than 2%, a typically reliable sign that momentum is lacking. For now, the range carved out in recent weeks between 36.15 and 41.46 remains our guidepost.
IG Client Sentiment Index: Crude Oil Price Forecast (October 8, 2020) (Chart 3)
Oil - US Crude: Retail trader data shows 51.93% of traders are net-long with the ratio of traders long to short at 1.08 to 1. The number of traders net-long is 2.88% lower than yesterday and 1.21% lower from last week, while the number of traders net-short is 3.56% higher than yesterday and 16.24% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude prices may continue to fall.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil - US Crude price trend may soon reverse higher despite the fact traders remain net-long.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
