Crude Oil Price Forecast: Triangle Breakout Lacks Momentum - What's Next?
Apr 21, 2022
With the Russian invasion of Ukraine on the cusp of entering its third month, energy markets have endured another wave of increased volatility. But the news flow around oil has been conflicting to say the least, and it may be a bad omen for crude oil prices that it has not been able to sustain a rally on the back of not only a technical breakout, but signs that oil supply is coming in lower than previous estimates.
While in recent weeks news has emerged that the US has increased its oil production and supplies available to the market, yesterday’s and today’s decline in crude oil prices has been marked by what should have been a bullish catalyst: OPEC+ produced less oil in March than expected. Failure by oil prices to rebound amid news of weaker supply suggests that the recent bullish breakout attempt may fail, setting up a return to the recent lows established at the start of April.
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. However, in an environment characterized by geopolitical tensions, crude oil prices continue to broadly follow movements in oil volatility.
OVX (OIL VOLATILITY) TECHNICAL ANALYSIS: DAILY PRICE CHART (APRIL 2021 TO APRIL 2022) (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) was trading at 53.68 at the time this report was written, having recently rebounded from its lowest levels since late-February. The 5-day correlation between OVX and crude oil prices is -0.07 while the 20-day correlation is +0.72. One week ago, on April 13, the 5-day correlation was -0.67 and the 20-day correlation was +0.79.
CRUDE OIL PRICE TECHNICAL ANALYSIS: DAILY CHART (OCTOBER 2020 TO APRIL 2022) (CHART 2)
A reconstituted triangle pattern suggests that crude oil prices are seeing meager bullish momentum after a topside breakout last week. While not textbook, a potential evening star candlestick pattern emerged between Friday and Tuesday, indicating that the bullish breakout effort will fail. But for a few days in early-March, crude oil prices have largely remained between the 61.8% and 100% Fibonacci extension levels measured from the November 2020 low, October 2021 high, and December 2021.
Bearish momentum is beginning to set back in, oil prices below their daily 5-, 8-, 13-, and 21-EMA envelope (which is not yet in bearish sequential order). Daily MACD is on the verge of dropping below its signal line, while daily Slow Stochastics failed to reach overbought territory and are turning lower. A move back towards recent lows near 94.42 (61.8% Fibonacci extension of the aforementioned measurement) is possible in the near-term.
CRUDE OIL PRICE TECHNICAL ANALYSIS: WEEKLY CHART (MARCH 2008 TO APRIL 2022) (CHART 3)
On the weekly timeframe, it remains clear that that bullish momentum has stalled. While crude oil prices are back above their weekly 4-, 8-, and 13-EMAs, weekly MACD is on the cusp of issuing a sell signal (albeit above its signal line) and weekly Slow Stochastics are continuing to trend lower towards their median line. It still remains preferred to “focus on lower-term timeframes (4-hour, daily)…for the foreseeable future.”
IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (APRIL 20, 2022) (CHART 4)
Oil - US Crude: Retail trader data shows 60.73% of traders are net-long with the ratio of traders long to short at 1.55 to 1. The number of traders net-long is 13.42% higher than yesterday and 7.95% lower from last week, while the number of traders net-short is 7.83% lower than yesterday and 2.41% 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.
Positioning is more net-long than yesterday but less net-long 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
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastytrade is a trademark/servicemark owned by tastytrade.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).
tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.