July 6, 2022
  • July 6, 2022

Crude Oil Price Prediction: Entering Decisive Territory

By on April 22, 2021 0

Crude Oil Outlook:

  • Crude oil prices have started to move towards the top of a short-term symmetrical triangle, while testing the downtrend rising to an all-time high.
  • Energy markets were the source of two crises that erupted at the start of the year – the cold snap in Texas and the blockage of the Suze Canal – and thematic influences appear to be returning to normal (for example example, what does OPEC + do?).
  • According to IG Client Sentiment Index, crude oil prices have a short-term bearish bias.

Reel of crude oil price

Crude oil prices have faced crises of volatility in recent weeks, although nothing quite like what was experienced around Texas’ record cold snap, the blockade of the Suez Canal. As short-term supply constraints eased, the frenzy that pushed crude oil prices to their highest year-on-year level also eased.

Yet, with measures of economic growth continuing to accelerate, the balance of risks to crude oil has allowed the market to stabilize. To many, therefore, it may appear that crude oil prices remain largely directionless.

Instead, crude oil prices may simply head to the top of a symmetrical triangle, while trying to maintain movement above the descending trendline from July 2008 highs (all-time high ) and June 2014. It’s almost time to break up for bulls and bears.

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The relationship between oil volatility and oil prices remains normal

Crude oil prices relate to volatility like most other asset classes, especially those with 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 about cash flow, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility.

Increased uncertainty in financial markets due to increased macroeconomic tensions decreases theoretical demand for energy; signs that the global economy is recoveringrcoronavirus pandemic reduces uncertainty, and therefore, volatility.

OVX technical analysis (oil volatility): daily price chart (April 2020 to April 2021) (Chart 1)

Crude Oil Price Prediction: Entering Decisive Territory - For The Bulls And The Bears

Oil volatility (as measured by Cboe’s Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility derived from the USO options chain) closed during the week at 39.39. Oil volatility continues to persist around levels known since 2019. Regarding the future curve, stability also remains in sight.

With oil volatility moving sideways and crude oil prices oscillating, the correlations we are monitoring remain “normal” (above -0.50). The 5-day correlation between the OVX and crude oil prices is -0.95 while the correlation at 20 days is -0.68; and a week ago the April 15, the 5-day correlation was -0.74 and the correlation at 20 days was -0.26.

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Technical analysis of the price of crude oil: weekly chart (December 2013 to April 2021) (Chart 2)

Crude Oil Price Prediction: Entering Decisive Territory - For The Bulls And The Bears

In the previous crude oil price forecast, it was noted that “the weekly long wicks indicate strong market demand at the weekly 13-EMA, which is actually a moving average of the last quarter of the stock. prices. Only if the weekly 13-EMA breaks on a closing basis does the outlook shift from neutral to bearish. For now, we remain open to a return to a bullish breakout opportunity above the multi-year downtrend line. The weekly 13-EMA held support until April, and now crude oil prices are again in decisive territory at the multi-year downtrend line from historic highs.

Technical analysis of crude oil price: daily chart (April 2020 to April 2021) (Chart 4)

Crude Oil Price Prediction: Entering Decisive Territory - For The Bulls And The Bears

Reconstructing the ascending parallel channel of the November 2020 and April 2021 lows against the March 2020 highs, it appears that crude oil prices are heading towards what could be a symmetrical triangle over the daily period – not too below the 2020 high of 65.65. It is also true that the downtrend line of the July 2008 and June 2014 highs is approaching, leaving open the possibility of a bullish breakout.

Crude oil prices are caught in their daily envelope of 5, 8, 13 and 21 EMAs, which is neither bearish nor bullish. The Daily MACD is slipping lower towards its signal line, while the Daily Slow Stochastics have retreated from oversold territory. The momentum has shifted from bullish to neutral, however, suggesting that more time is needed before resolution.


Crude Oil Price Prediction: Entering Decisive Territory - For The Bulls And The Bears

Oil – US Crude: Retail trader data shows 63.57% of traders are net long with a long to short ratio of 1.74 to 1. The number of net long traders is 7.29% higher compared to yesterday and 12.72% higher than last week, while the number of net-short traders is 5.20% lower than yesterday and 24.49% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that US oil and crude prices may continue to decline.

Traders are still longer than yesterday and last week, and the combination of current sentiment and recent changes gives us a bearish countercurrent trading bias on Oil and the US.

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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