News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site. See our updated Privacy Policy here.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
More View more
Real Time News
  • (ASEAN Fundy) US Dollar Forecast: Turning Point Reached? USD/SGD, USD/THB, USD/IDR, USD/PHP #USD $USDGSD $USDTHB $USDIDR $USDPHP https://www.dailyfx.com/forex/fundamental/article/special_report/2021/10/25/US-Dollar-Forecast-Turning-Point-Reached-USDSGD-USDTHB-USDIDR-USDPHP.html?CHID=9&QPID=917702&utm_source=Twitter&utm_medium=Dubrovsky&utm_campaign=twr https://t.co/87N97EGWdr
  • It’s important for traders to be familiar with FX spreads as they are the primary cost of trading currencies. Understand a pair's spread here: https://t.co/zEEUHZBx7g https://t.co/N2GqH7QoOd
  • RT @mkraju: Manchin signaling he’s open to $1.75T for social safety net bill, per source briefed on matter, but it’s unclear where the pric…
  • Further your forex knowledge and gain insights from our expert analysts @JohnKicklighter and @JStanleyFX on $USD with our free Q4 market analysis guide, available for free today. https://t.co/7G7pWntiyY #DailyFXGuides https://t.co/XYCRng3hEW
  • RT @JournalistRoss: From CNN's @mkraju: The goal among Democratic leaders is to have a vote Wednesday or Thursday on the infrastructure pac…
  • *Reminder: Weekly Strategy Webinar tomorrow at 8:30am ET on @DailyFX !! https://t.co/lxd5fZnn4H
  • Greed is a natural human emotion that affects individuals to varying degrees. Unfortunately, when viewed in the context of trading, greed has proven to be a hindrance more often than it has assisted traders. Learn how to control greed in trading here: https://t.co/kODPAfJE79 https://t.co/L15w1dzclc
  • Wow Liverpool... https://t.co/9Mx6Xmw4iS
  • With the $SPX, Bitcoin and Fed 2022 rate forecasts pushing record highs; the heavy economic docket for the coming week will make for some loaded trading potential. The events and markets I'm looking at ahead: https://www.dailyfx.com/forex/video/daily_news_report/2021/10/23/SP-500-Reversal-ECB-Decision-FAANG-Earnings-Top-Volatility-Themes-Next-Week.html https://t.co/1SGirtalSb
  • GDP (Gross Domestic Product) economic data is deemed highly significant in the forex market. GDP figures are used as an indicator by fundamentalists to gauge the overall health and potential growth of a country. Learn use GDP data to your advantage here: https://t.co/Yl9vM7kO6a https://t.co/wdbXlx7ChB
Crude Oil Price Forecast: Rally Continues, But Looking Overextended in Near-term

Crude Oil Price Forecast: Rally Continues, But Looking Overextended in Near-term

Christopher Vecchio, CFA, Senior Strategist
Advertisement

Crude Oil Outlook:

  • Now in the second week of October, fresh yearly highs have been found again – in fact, the highest levels since October 2014.
  • Crude oil prices are now +8.02% above their daily 21-EMA, which is the greatest differential since March 5, when they were +9.61% above their daily 21-EMA.
  • According to the IG Client Sentiment Index, crude oil prices have a mixed bias.

Crude Oil Prices Hit New Highs

When we last checked in on crude oil prices at the end of September, it was noted that “it is our base case scenario that the persistent supply-demand imbalance that has defined energy markets throughout 2021 will continue, which helps keep intact the bullish fundamental argument for the next few months. As a result, while a break to fresh yearly highs may be around the corner for crude oil prices, there is a near-term warning sign to be concerned about.”

Indeed, crude oil prices moved sideways for a few more days after our September forecast update before ultimately churning up to new yearly highs, and now in the second week of October, fresh yearly highs have been found again – in fact, the highest levels since October 2014.

While the fundamental argument continues to be bullish, there are some technical concerns that have emerged that suggest that the recent crude oil price rally is starting to look overextended, consistent with recent episodes that have coincided with near-term tops for a few days. That’s to say that if crude oil prices pullback soon, it would still be setting up another ‘buy the dip’ opportunity.

Relationship Between Oil Volatility and Oil Prices Normalizing

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.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (October 2020 to October 2021) (Chart 1)

Crude Oil Price Forecast: Rally Continues, But Looking Overextended in Near-term

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 trading at 39.15 at the time this report was written.

The 5-day correlation between OVX and crude oil prices is -0.41 while the 20-day correlation is +0.71; and one week ago, on October 4, the 5-day correlation was +0.23 and the 20-day correlation was +0.65.

Oil volatility continues to persist around levels experienced going back to 2019, suggesting normal price action in energy markets (despite what news headlines are suggesting otherwise).

Crude Oil Price Technical Analysis: Daily Chart (October 2020 to October 2021) (Chart 2)

Crude Oil Price Forecast: Rally Continues, But Looking Overextended in Near-term

Crude oil’s technical structure remains broadly constructive. Crude oil prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD continues to extend its climb above its signal line, while daily Slow Stochastics remain in overbought territory.

But even as crude oil prices have surged at the start of the week, but the rally is beginning to look a frothy in the near-term. Spot prices are now +2.7% above their daily 5-EMA: recent tops in crude oil prices emerged on September 15, September 27, and October 5, when crude oil prices were above their daily 5-EMA by +2.63%, +2.54%, and +2.64%, respectively.

Moreover, crude oil prices are now +8.02% above their daily 21-EMA, which is the greatest differential since March 5, when they were +9.61% above their daily 21-EMA. March 5 was the high watermark for crude oil prices for almost three months. A round of profit taking could be around the corner.

Crude Oil Price Technical Analysis: Weekly Chart (January 2008 to October 2021) (Chart 3)

Crude Oil Price Forecast: Rally Continues, But Looking Overextended in Near-term

In late-September it was noted that “another upside move is due before the end of the year. As such, the longer-term technical posture remains bullish. A doubling of the multi-month sideways range (76.98-61.56) suggests a measured move up to 92.40, which puts crude oil prices on track to reach the OPEC+ fiscal breakeven of 92.00 before the end of the year.” Crude oil prices may be hitting a near-term inflection point, however, with the backside of the rising trendline from the November 2020 and May 2021 lows coming into play at 82.60 in the coming week.

IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (October 11, 2021) (CHART 4)

Crude Oil Price Forecast: Rally Continues, But Looking Overextended in Near-term

Oil - US Crude: Retail trader data shows 36.66% of traders are net-long with the ratio of traders short to long at 1.73 to 1. The number of traders net-long is 16.99% higher than yesterday and 7.47% lower from last week, while the number of traders net-short is 7.09% higher than yesterday and 18.78% 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.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed Oil - US Crude trading bias.

--- Written by Christopher Vecchio, CFA, Senior Strategist

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

DISCLOSURES