Technical Tuesday: Crude Oil

Welcome to Technical Tuesday, a weekly report where we highlight some of the most interesting markets that will hopefully appease technical analysts and traders alike.

Given that we have the Fed, BoE and SNB rate decisions coming up later in the week, we are not going to cover the usual suspects – FX, indices and gold – in this week’s edition of Technical Tuesday, as the technical outlook on these markets can quickly become invalid. Instead, we will focus on crude oil, which should be largely immune to this week’s central bank decisions.

Has oil bottomed?

Well, the price action on crude oil in the last couple of days has certainly been bullish. But this comes on the back of a sharp breakdown last week. Prior to that, oil prices had been stuck inside a large corridor for a long time. So, the fact that oil prices broke down last week after a lengthy consolidation means more price action is needed to confirm whether a low has been formed. Therefore, it would be premature to call this two-day recovery as a market bottom. Guilty until proven otherwise, is how I would approach crude prices. The bulls need to show us clear evidence that oil has indeed formed a low.

It is worth watching prices closely after Brent oil broke the support level of its well-established range, at around $75.00 last week.

If we see a rejection of this level as prices test it from underneath, then it may lead to more technical selling pressure in the days and weeks ahead. If we do see a sharp rejection, then the bears might then target $70.00, followed by $65.75 – the December 2021 low – and possibly even $60.00 thereafter.

However, if the bulls reclaim that $75.00 level, then we should expect to see some upside follow-through as the bears rush to abandon their bets. In the event risk appetite improves markedly, a clean break back above $75.00, could even pave the way for a run back towards $80.00.

So, let the market decide on the direction then look for opportunities in the direction of the break.

Why have oil prices bounced back?

Like everything else, crude oil prices have bounced back sharply off their recent lows over the past day and a half as risk sentiment improved following the coordinated actions of major central banks at the weekend and UBS’s takeover of CS. But the fact oil prices had been trending lower for months, their breakdown last week from a multi-week consolidation pattern suggests there may be more downside potential in oil prices. For now, news that Russia has decided to keep its oil production at a reduced level through June and calmer market conditions has helped to keep prices in the positive territory.

Demand outlook uncertain as non-OPEC supply rises

The crude oil outlook remains murky, despite the ongoing OPEC+ restrictions.

The impact of very high levels of inflation over the past couple of years has been hurting consumption, while the significant interest rate tightening by central banks have further reduced consumer and business buying power. The full impact of the past tightening has yet to be felt fully on the global economy. There’s hope that with China recently re-opening its economy, demand would accelerate.

On the supply side, no-OPEC production is continuing to rise and is absorbing the pent-up demand from China’s re-opening. The International Energy Agency recently forecast that the global oil supply will “comfortably” exceed demand in the first half of this year.

With the demand outlook uncertain, the OPEC+ decided in November to reduce its output target by 2 million bpd, in what was the largest cut since the early days of the pandemic in 2020. The group plans to maintain this reduction for the whole of 2023. But if the demand outlook deteriorates further, or if non-OPEC supply continues to rise, then the OPEC might have to cut even more production to prevent prices from falling significantly further.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

Technical analysis FAQs

What is technical analysis?

Technical analysis is a method used to evaluate financial markets using historical price data to identify trends and patterns. The theory is that previous trading activity can give insight into future price movements.

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