Crude Oil Outlook:
- Crude oil prices continue to flirt with the downtrend dating back to the all-time high, not yet able to escape its gravitational pull. But they are nearing triangle resistance, which if broken, points to fresh yearly highs.
- Earlier this week, Austrian Foreign Minister Alexander Schallenberg said that “certain important issues are still open and unresolved” when it comes to restoring the JCPOA.
- According to the IG Client Sentiment Index, crude oil prices have a near-term bullish bias.
Crude Oil Prices Near Top of Triangle
Crude oil prices have experienced some chop in recent days, but nothing new beyond what has been par-for-the-course trading conditions the past few weeks: consolidation into 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.
Against this backdrop, on-again off-again news regarding the US-Iran negotiations around the JCPOA have proved to be a focal point, insofar as a deal could lead to a large influx of Iranian oil to global supply, thereby upsetting the delicate supply-demand imbalance that OPEC+ has been working through. But just two days ago, Austrian Foreign Minister Alexander Schallenberg said that “certain important issues are still open and unresolved” when it comes to restoring the JCPOA – so a deal isn’t about to arrive.
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 (May 2020 to May 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 35.58. Oil volatility continues to persist around levels experienced going back to 2019. Looking at the futures 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 May 18, the 5-day correlation was -0.72 and the 20-day correlation was -0.61.
Crude Oil Price Technical Analysis: Daily Chart (December 2020 to May 2021) (Chart 2)
Crude oil prices continue to funnel into what appears to be a symmetrical triangle on the daily timeframe – and it continues to gravitate towards both the 2020 high (65.65) the descending trendline from the July 2008 and June 2014 highs. It’s worth noting that the aforementioned trendline from all-time highs recently served as support on the pullback – a small but meaningful change in behavior.
Crude oil prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD starting to trend higher above its signal line, while daily Slow Stochastics have quickly accelerated towards overbought territory. Momentum is slowly shifting to a more bullish stance. It remains the case that there persists the possibility of a bullish breakout.
Crude Oil Price Technical Analysis: Weekly Chart (December 2007 to May 2021) (Chart 3)
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…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.” Holding in make-or-break territory, improvements in the technical structure on lower timeframes suggests that a breakout attempt may soon emerge.
IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (May 25, 2021) (CHART 4)
Oil - US Crude: Retail trader data shows 42.54% of traders are net-long with the ratio of traders short to long at 1.35 to 1. The number of traders net-long is 25.89% lower than yesterday and 4.99% lower from last week, while the number of traders net-short is 27.55% higher than yesterday and 3.12% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil - US Crude prices may continue to rise.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bullish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
