WTI Crude Oil: Signs of a Major Bottom as Futures Expiration Looms Again
Matt Weller, CFA, CMT May 18, 2020 12:49 PM
Today’s impressive price rally suggests the odds of another round of market-breaking sub-zero prices is increasingly unlikely...
As we noted in Friday’s weekly oil market preview report, this week’s physically-delivered oil futures contract expiration raised the specter of another round of below-zero prices for the world’s most important commodity. While traders can’t quite wave an “all clear” flag yet, today’s impressive price rally suggests the odds of another round of market-breaking sub-zero prices is increasingly unlikely.
From a fundamental viewpoint, the US recorded its first decline in oil inventories since January, and there is a push for OPEC+ not to boost output in the next phase of its agreement. At the same time, speculators and commercial entities have had a month to get additional storage infrastructure in place, potentially deterring a re-run of the negative price implosion that we saw last month.
Technically speaking, there is increasing evidence that West Texas Intermediate (WTI) crude oil has carved out a potentially significant bottom. Beyond the fact that prices reached levels that, frankly, most analysts considered impossible last month, the chart is now showing an “inverted head-and-shoulders” pattern over the last two months. For the uninitiated, this pattern shows a transition from a textbook downtrend (lower highs and lower lows) to an uptrend (higher highs and higher lows) and is often seen at significant bottoms in the market:
Source: TradingView, GAIN Capital. Please note these prices may not precisely reflect the prices on GAIN Capital trading platforms.
With prices already trading well above the pattern’s neckline, even before today’s big +9% rally, the medium-term technical outlook for oil is brightening. To the topside, the last nearby level of previous resistance comes from the minor high in early March near 36.25; a break above that level could pave the way for an extension back above $40.00 in time. That said, a break back below the 50-day EMA and neckline around $27.00 could still shift the near-term bias back to neutral.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.