Alert

What is the APE preferred stock and how does it affect AMC traders?
tastytrade logo
monitoring crude oil pricing

May 19, 2022

Crude Oil Price Forecast: Two-Way Action Continues - What's Next?

By:Christopher Vecchio

Supply-Demand Headlines Dominate

Crude oil prices continue to slide after touching their highest level since March 24 in yesterday’s session. News that the United States may ease sanctions on Venezuela in an effort to bring more energy supply to global markets helped spark the downturn, as did comments by Federal Reserve Chair Jerome Powell regarding the Fed’s intent to continue to push forth with aggressive rate hikes.

But the ability for crude oil prices to move significantly lower remains in question as long as supply side concerns linger. OPEC+ is falling short of their production estimates, largely thanks to a -9% drop in Russian production in April. The US isn’t meeting the moment either, with crude oil production recently falling for the first time since January. Until the Russian invasion of Ukraine ends, the ensuing sanctions are lifted, and OPEC+ countries increase output, it’s likely supply side concerns persist.

Oil Volatility, Oil Price Correlation Remains Weak

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. Crude oil volatility holding steady at historically elevated levels has led to a disconnect in the correlation with oil prices.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (May 2021 to May 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 52.44 at the time this report was written, having held steady for the past six weeks. The 5-day correlation between OVX and crude oil prices is -0.65 while the 20-day correlation is -0.33. One week ago, on May 11, the 5-day correlation was -0.54 and the 20-day correlation was +0.02.

Crude Oil Price Technical Analysis: Daily Chart (October 2020 to MAY 2022) (Chart 2)

Despite a lot of two-way price action, not much has truly changed for crude oil prices. But for a few days in early-March, trading has been contained between the 61.8% and 100% Fibonacci extension levels (94.42 to 114.20) measured from the November 2020 low, October 2021 high, and December 2021. 

The recent breakout from the March/April triangles (the first – resistance drawn from the early- and mid-March swing highs – the second – resistance drawn from the early-March and April highs – and the third – drawn from the mid-March and April highs) produced a return to the high set on March 24 before failing. 

It’s difficult to suggest that crude oil prices have sustainable bullish momentum. Crude oil prices below their daily 5-, 8-, 13-EMAs, but are finding support at their daily 21-EMA. The EMA envelope is no longer in bullish sequential order. Daily MACD is on the verge of issuing a sell signal (albeit above its signal line), while daily Slow Stochastics are about to exit overbought territory. 

As was noted at the end of April, it remains the case that “traders should anticipate continued volatility within the recent two month range; the multiple percentage point moves within the range effectively means that crude oil prices are moving fast, but going nowhere.” It remains the base case scenario that crude oil prices will trade between approximately 94.42 and 114.20 for the foreseeable future.

Crude Oil Price Technical Analysis: Weekly Chart (March 2008 to May 2022) (Chart 3)

Nothing has changed materially since the end of April. “On the weekly timeframe, it remains clear that that bullish momentum has stalled.” Crude oil prices are slipping below their weekly 4-EMA, though the weekly 4-, 8-, and 13-EMA envelope remains in bullish sequential order. Weekly MACD is on the cusp of issuing a sell signal (albeit above its signal line) and weekly Slow Stochastics are barely holding above 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 (May 18, 2022) (Chart 4)

Oil - US Crude: Retail trader data shows 44.00% of traders are net-long with the ratio of traders short to long at 1.27 to 1. The number of traders net-long is 8.36% lower than yesterday and 13.35% lower from last week, while the number of traders net-short is 6.63% lower than yesterday and 38.29% 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.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

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.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on tastytrade.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.