Crude Oil Outlook:
- Crude Oil Prices Continue to See Volatile Price Action in Both Directionsalthough a break lower from a recent symmetrical triangle appears to be underway.
- Rising US oil production, combined with lower US demand, is easing upward pressure on energy prices.
- According to IG Customer Opinion Indexcrude oil prices have a short-term bearish bias.
The tension between supply and demand is easing
Crude oil prices are trading lower on the day as short-term imbalances between supply and demand appear to ease. Markets are focusing on subtle but significant changes in the US, where according to the EIA’s weekly report, crude oil production has increased while demand has begun to cool.
According to the EIA, “youS Crude oil refinery inputs averaged 15.9 million barrels per day in the week ending April 1, 2022, 35,000 barrels per day higher than the previous week’s average.“On the demand side, oil inventories increased by +2.421 million barrels against an expected drawdown of -2.056 million barrels.
While the European Union failed to ban Russian coal and oil imports, citing a technical error, it looks like another attempt will be made tomorrow. This could introduce more two-way volatility in the energy markets, calling into question the validity of any technical moves on the charts. Until then, however, with markets focusing on data from the US, a bearish breakout is starting to gain momentum from the recent symmetric triangle in Crude Oil prices.
Oil volatility, deteriorating oil price correlation
Crude oil prices have a relationship with 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 the increased volatility – signaling greater uncertainty around cash flow, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. The sharp decline in oil volatility over the past two weeks has not been accompanied by a corresponding drop in oil prices, even though oil prices have eased back below $100/brl.
OVX (Oil Volatility) Technical Analysis: Daily Price Chart (April 2021 to April 2022) (Chart 1)
Oil volatility (as measured by Cboe’s Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility derived from the USO options chain) was trading at 53.92 at the time of writing, the lowest reading since late February. The 5-day correlation between OVX and crude oil prices is -0.07 while the 20-day correlation is +0.70. Oa week ago, the March 30, the 5-day correlation was +0.71 and the 20-day correlation was +0.81.
Crude Oil Price Technical Analysis: Daily Chart (October 2020 to April 2022) (Chart 2)
Last week, it was noted that “Crude Oil prices are beginning to consolidate into a symmetrical triangle, which against the background of the previous upside would call for a break up. But in this environment, dominated by off-the-cuff headlines on the newswire, it may be best to view the symmetric triangle as a neutral pattern that could give a breakout either way. The top of the triangle will be reached by the second week of April, meaning a breakout to the March high above 130 or to the late February low (base of the triangle) should occur very soon.
Consistent with this view, a bearish breakout may begin. Crude Oil prices are trading below triangle support, and bearish momentum is building with prices below their daily envelope of 5, 8, 13, and 21-EMA, which is in bearish sequential order. The daily MACD is about to break below its signal line, while the daily Slow Stochastic is about to enter oversold territory. Lower targets include the March 15th low (93.53) and the February 18th low (87.46).
Crude Oil Price Technical Analysis: Weekly Chart (March 2008 to April 2022) (Chart 3)
On the weekly timeframe, there is more evidence that momentum has stalled. Crude Oil prices are now below their weekly 4- and 8-EMAs, even though the weekly 4-, 8-, and 13-EMA envelope remains in sequential bullish order. The weekly MACD is about to issue a sell signal (albeit above its signal line), while the weekly slow stochastic continues to decline towards its middle line. The fact remains that “if the aforementioned symmetrical triangle does produce a breakout, it will likely be in a rapid and violent manner that will not necessarily reflect on the weekly time frame before the fact; focusing on shorter timeframes (4 hours, daily) seems appropriate for the foreseeable future.
IG CUSTOMER SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (April 6, 2022) (CHART 4)
Oil – US Crude: Retail trader data shows 55.76% of traders are net long with a ratio of long to short traders of 1.26 to 1. The number of net long traders is 2.28% lower than yesterday and 23.02% higher than last week. , while the number of net-short traders is 13.72% lower than yesterday and 25.79% lower than last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that US crude oil prices may continue to decline.
Traders are even sharper than yesterday and last week, and the combination of current sentiment and recent shifts gives us a stronger contrarian Oil – US Crude-bearish trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist