The Downtrend May Be Over – What’s Next?


Crude Oil Outlook:

  • The Saudi Energy Minister stated that OPEC+ may lower oil manufacturing to right imbalances within the futures market.
  • The downtrend from the June and July swing highs has damaged, and crude oil costs are buying and selling above their each day 21-EMA (one-month shifting common) for the primary time since June 16.
  • According to the IG Client Sentiment Index, crude oil costs have a bullish bias within the near-term.

Supply Concerns in Focus

As the worldwide vitality provide disaster will get worse – significantly for Europe – OPEC+ sparked oil markets yesterday with information of a possible manufacturing lower. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman famous that the futures market is coping with poor liquidity, which is scary a distorted view of the tight provide image.

In different phrases, crude oil costs are too low, and it might be the case {that a} manufacturing lower by OPEC+ turns into extra probably if a brand new Iranian nuclear deal is achieved.

The shift within the basic notion round crude oil costs – ignoring recession considerations within the US and the demand slowdown in China – helps spark a significant technical turnaround.

Oil Volatility, Oil Price Correlation Remains Negative

Crude oil costs have a relationship with volatility like most different asset lessons, particularly those who have actual financial makes use of – different vitality property, mushy and exhausting metals, for instance. Similar to how bonds and shares don’t like elevated volatility – signaling higher uncertainty round money flows, dividends, coupon funds, and many others. – crude oil tends to endure during times of upper volatility. Crude oil volatility dropping again is proving supportive of the current rise in crude oil costs.

OVX (Oil Volatility) Technical Analysis: Daily Price Chart (August 2021 to August 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 choice chain) was buying and selling at 47.69 on the time this report was written. The 5-day correlation between OVX and crude oil costs is -0.67 whereas the 20-day correlation is -0.33. One week in the past, on August 16, the 5-day correlation was -0.84 and the 20-day correlation was -0.20.

Crude Oil Price Technical Analysis: Daily Chart (August 2021 to August 2022) (Chart 2)

Crude Oil Price Forecast: The Downtrend May Be Over – What’s Next?

Crude oil costs try to interrupt the downtrend from the mid-June and late-July swing highs, and in flip are engaged on their first each day shut above their each day 21-EMA (one-month shifting common) since June 16. Momentum is popping bullish, with crude oil costs above their each day 5-, 8-, 13-, and 21-EMA envelope, which is in neither bearish nor bullish sequential order. Daily MACD is rising albeit nonetheless under its sign line, whereas each day Slow Stochastics have moved above their median line. Consistent with earlier commentary that “a move above the daily 21-EMA would…offer the greatest confidence that the sell-off has finished,” it’s attainable that crude oil costs are on the precipice of their subsequent leg larger.

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

Crude Oil Price Forecast: The Downtrend May Be Over – What’s Next?

Bearish momentum has began to ease on the weekly timeframe as nicely. Crude oil costs are engaged on their first shut above their weekly 4-EMA for the primary time for the reason that week of June 6, although stay under their weekly 8- and 13-EMAs. Weekly MACD’s decline is starting to abate, probably staving off a drop under its sign line, whereas weekly Slow Stochastics are on the verge of exiting oversold territory. A weekly shut above the weekly 4-EMA at 93.00 would assist reinforce the bullish technical reversal narrative.


Crude Oil Price Forecast: The Downtrend May Be Over – What’s Next?

Oil – US Crude: Retail dealer information reveals 63.19% of merchants are net-long with the ratio of merchants lengthy to brief at 1.72 to 1. The variety of merchants net-long is 1.28% decrease than yesterday and eight.50% decrease from final week, whereas the variety of merchants net-short is 29.10% larger than yesterday and 36.36% larger from final week.

We sometimes take a contrarian view to crowd sentiment, and the actual fact merchants are net-long suggests Oil – US Crude costs might proceed to fall.

Yet merchants are much less net-long than yesterday and in contrast with final week. Recent adjustments in sentiment warn that the present Oil – US Crude value pattern might quickly reverse larger regardless of the actual fact merchants stay net-long.

— Written by Christopher Vecchio, CFA, Senior Strategist

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