Crude Oil Outlook:
- Crude oil prices have started to funnel into the vertex of a near-term symmetrical triangle, all the while testing the downtrend dating back to the all-time high.
- Energy markets have put behind dual crises that cropped up in the early part of the year – the Texas cold spell and the Suze Canal blockage – and thematic influences appear to be returning to normal (e.g. what’s OPEC+ doing?).
- According to the IG Client Sentiment Index, crude oil prices have a near-term bearish bias.
Crude Oil Prices Coil
Crude oil prices have dealt with fits of volatility in recent weeks, though nothing quite like what was experienced around the record Texas cold spell the Suez Canal blockage. As near-term supply constraints eased, so too did the frenzy that pushed crude oil prices to their yearly high.
Yet with measures of economic growth continuing to accelerate, the balance of risks for crude oil has allowed the market to stabilize. For many, it thus may seem like crude oil prices remain largely directionless.
Instead, crude oil prices may simply be funneling to the vertex of a symmetrical triangle, all the while attempting to sustain a move above the descending trendline from the July 2008 (all-time high) and June 2014 highs. It’s almost make-or-break time for bulls and bears alike.
Relationship Between Oil Volatility and Oil Prices Remains Normal
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. Similar to 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 recovering from the coronavirus pandemic reduces uncertainty, and thus, volatility.
OVX (Oil Volatility) Technical Analysis: Daily Price Chart (April 2020 to April 2021) (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) closed out the week at 39.39. Oil volatility continues to persist around levels experienced going back to 2019. Looking at the future curve, stability remains in sight too.
With oil volatility trading sideways, and crude oil prices bobbing around, the correlations we monitor remain ‘normal’ (greater than -0.50). The 5-day correlation between OVX and crude oil prices is -0.95 while the 20-day correlation is -0.68; and one week ago, on April 15, the 5-day correlation was -0.74 and the 20-day correlation was -0.26.
Crude Oil Price Technical Analysis: Weekly Chart (December 2013 to April 2021) (Chart 2)
In the prior crude oil price forecast it was noted that “the long weekly wicks speak to strong demand in the market right at the weekly 13-EMA, which is effectively a moving average of the past one quarter of price action. Only if the weekly 13-EMA breaks on a closing basis would the perspective shift from neutral to bearish. For now, we remain open to a return back to a bullish breakout opportunity above the multi-year descending trendline.” The weekly 13-EMA has held as support through April, and now crude oil prices are once more in make-or-break territory at the multi-year descending trendline from all-time highs.
Crude Oil Price Technical Analysis: Daily Chart (April 2020 to April 2021) (Chart 4)
Reconstituting the ascending parallel channel from the November 2020 and April 2021 lows against the March 2020 highs, it appears that crude oil prices are funneling into what may be a symmetrical triangle on the daily timeframe – not too far below the 2020 high at 65.65. It’s also the case that the descending trendline from the July 2008 and June 2014 highs is nearby, leaving open the possibility of a bullish breakout.
Crude oil prices are enmeshed among their daily 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is gliding lower towards its signal line, while daily Slow Stochastics have pulled back from oversold territory. Momentum has shifted from bullish to neutral, however, suggesting that more time is needed before resolution.
IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (April 22, 2021) (CHART 5)
Oil - US Crude: Retail trader data shows 63.57% of traders are net-long with the ratio of traders long to short at 1.74 to 1. The number of traders net-long is 7.29% higher than yesterday and 12.72% higher from last week, while the number of traders net-short is 5.20% lower than yesterday and 24.49% lower 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
