Crude Oil Technical Analysis

Oil Bulls continue to be rewarded by an OPEC Accord to curb production as the price of spot WTI trades at the highest levels since July. While the recent rise has been impressive following the post-Brexit announcement move down to $39.17, what is more impressive is the potential longer-term chart set-up for a Bull Run to the upside.

There is still cause for concern by some who think a USD Bull Market is in the making once the Fed decides to raise short-term interest rates or due to weakness elsewhere. Such a strengthening of the US Dollar could naturally put pressure on the price of Oil. However, if the USD fails to mature into an uptrend, we could be setting up for a favorable environment for further upside in the price of Crude Oil.
Another development in institutional positioning is the largest increase in long positions in WTI since January. This bullish positioning is an aggressive reversal from the bearish sentiment that had not been seen since September 2015 in recent CoT readings. The bullish sentiment comes in the forms of straight long positions via futures as well as options contracts that increased 8.1%. Such bullish exposure could see the market favor further upside on the charts.


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A cut of at least 700,000 barrels per day was needed to balance the market in the first quarter of 2017

The Organization of the Petroleum Exporting Countries is moving closer to finalizing its first deal since 2008 to limit output, with most members prepared to offer Iran flexibility on production volumes, ministers and sources said.

Iran has been the main stumbling block for capping production, and while it has not yet responded to the proposal, it suggests OPEC members may be coming nearer to a consensus ahead of their meeting in Vienna on Nov. 30.

A stronger dollar makes oil, which is priced in the greenback, more expensive to buyers using other currencies.

But analysts said there were still obstacles for the producer group to overcome before it could reach a deal. OPEC is scheduled to meet next on Nov. 30.

the source

Volatility is anticipated to be high regardless of OPEC’s outcome whether they cut the production of Oil, and set a cap on production for the first time in eight years or whether they continue to produce at well. Recent comments from the Iranian Oil Minister, Bijan Namdar Zanganesh, have increased confidence following Russian Oil Minister’s comments last week about a highly probable deal coming to pass.

In addition to the encouraging comments about a, “highly probable” outcome for a production cut, the Options Market has shown high anticipation in the Oil Market. Open interest, which measures both long and short exposure in the Oil market ahead of the Vienna OPEC meeting is at its highest levels since 2007 as per the U.S. CFTC. Additionally, we’ve seen a record number of call volume, which is less of a commitment than outright longs while outright shorts in the Brent Oil have reached their highest level in more than two years.

The aggressive positioning helps to show that the price-risk may favor the upside given the calls would be exercised and the aggressive short positioning would be unwound. However, a failure to fulfill the agreement in September to cut collective output from 34 million to 32.5-33 million will no doubt see the price under pressure, and some wondering if a move toward a $30-handle is underway.


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Many thought OPEC was cutting production to raise the price of Oil. However, a recent Reuters report may be showing there was more to the decision to cut production, which could support the Bullish argument even further. While the supply imbalance (supposedly too little demand given supply coming from various producers) was the popular notion as to the reason for the cut, reports are now surfacing that prior production levels may have been testing capacity limits, and we’re not sustainable.

Looking at the OPEC cut from another angle, we may have been working with a WTI average H2 price in the upper half of $40/bbl while the world’s largest producers were pressing capacity limits. Naturally, the last two and a half years with a ~$84/bbl price range that included a ~78% drop from July 2014-February 2016 showed us that there is room for volatility. However, it’s fair to think that an average price in the upper half of $40/bbl may be long-term support, and if the chart’s hold up, we could be working on further upside from these levels in 2017.

Additionally, Russian Energy Minister Novak made clear on Friday that all oil firms were to cut output under the OPEC deal, adding market-wide belief that the deal will hold and the perceived market imbalances will balance soon. Another component worth watching is a possible pullback in the USD on an over-extension in the aftermath of the FOMC where more rate hikes were projected in 2017 that was revealed at the September FOMC meeting. Any subsequent USD weakness could also support the price of Crude Oil, which is denominated in USD.

We had recently noted how there had been an increase in demand for WTI call options with the most active being the 2018 December $80 Brent Crude calls. While not predictive, this flurry of options action helps to show that there are institutions working to positions themselves to capture further upside should it develop in WTI.


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We are now trading at the top of a channel drawn with the same slope as the support that we had been focusing on throughout the 2016 rebound and into 2017 (rising trendline in black on the chart above) drawn from the first higher low off the rebound from the February low. While we remain Bullish due to fundamental and technical factors, there is a rising wedge pattern developing that should warrant attention.

The rising wedge pattern has developed on the recent break into 17-month highs. Per the Daily Sentiment Index as of Wednesday’s close, the Crude market is composed of 75% Bulls, which remains well short of the 85% extreme Bullish sentiment reading that could mean there is a good deal more room to run in the market as 2017 gets underway. However, if the production cuts do not come to pass, it’s possible that the rising wedge could bring about a sharpsell-off that retraces (likely not all) of the recent 28% rally from the mid-November low.

Should price fail to break the $50/51 support zone, we’ll expect an eventual move to the 2015 high in early 2017. Ichimoku also favors a Bullish continuation move.

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The oil market may have provided the first legitimate head fake in markets for 2017. At the beginning of Tuesday’s trading session, the first official trading day in 2017, as many markets were observing New Year's Day on Monday, Oil began trading to 18-month highs by trading above $55 a barrel. The initial move higher had credibility as OPEC’s deal compliance seemed to be coming to fruition on initial reports of firm’s production after the official start of the production cuts agreed to in Vienna in late November.

Shortly after midmorning trade, oil had completely reversed earlier gains and eventually closed nearly 3% lower on the day. The aggressive reversal aligned with the volatility pattern we mentioned in the late December article the discussed in developing rising wedge pattern that can either be in ending diagonal preceding sharp losses or a leading diagonal that would favor aggressive gains. Either way, volatility could be a mainstay in the energy market in January 2017.

Should the price continue to hold above this level on a closing basis, we will favor a move toward the top of the channel near $59/60 per barrel.Should a reversal develop in the price of Crude Oil, we would be on the watch for the price to break down through the rising support levels mentioned above at $49/45. Only a break below this zone would take us from Bullish to Neutral. Until then, we will favor eventual upside heading into 2017. Regardless, we will expect further volatility in this key market.

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The "smart money" now has an even larger bearish position than they had in 2014 before crude oil plunged 70 percent.

The long-term chart of WTI crude oil shows how the 2016 bounce occurred off of the important $30 – $40 per barrel support zone, which is where the 2008 – 2009 crude oil bear market bottomed out as well. The fact that the “smart money” has shorted this bounce like crazy increases the chances that it’s a “dead-cat bounce” that leads to another correction. If the latter event occurs, I want to see how WTI crude oil acts at this support zone – if it breaks below, that would be a sign of even further weakness.

Brent crude oil has a similar $30 – $40 per barrel support zone that is worth watching:

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Crude Oil has become the poster-child for low volatility. As we head into the second week of trading in February, we have yet to break out of the macro opening range set in the first two weeks of January. The macro opening range high on January 03 is $55.21/bbl and the macro opening range low on January 11 is $50.75/bbl.

Given the extreme positioning divergence between speculators and hedgers, it is worth waiting to see which level, support or resistance will break. Should either level give way, and one side of the market fail to hold their position and reverse, we could see a strong follow through. In addition to the extreme positioning as displayed on the chart below, the Oil market is sitting at extremely low volatility right now, and the price is above long-term support near $50/52 per barrel.

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Price consolidations that are visualized as a sideways move are very boring to watch, but their bias is rather clear. Consolidation tends to favor continuation of the prior trend. Since Mid-August, the price of Crude Oil has march confidently higher alongside many other commodities and commodity currencies. While Crude Oil has lagged many of its commodity brethren, there does appear to be a unified march higher in the commodity field that could continue if the anticipation of inflation persists.

On the fundamental front, we got word that OPEC is looking to step up its compliance with the late-November supply cut accord. Recent numbers we’ve seen were regarding compliance to the agreed-upon cuts were as high as 92%, but recent comments from OPEC were revealed to seek 100% compliance, which would further drop the international supply of Oil, which could continue to favor further upside.

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Before Crude Oil broke down and traded below the 200-DMA ($48.65 as of 3/15/17), Oil and Gas Energy & Exploration stocks had broken down and appear to be leading Oil, so it continues to be worth watching. The rolling 20-day correlation for Crude Oil forward contract and the S&P Oil Producer Index is +.598 as of March 15, which is significant.

The price of Crude Oil recently traded below the 200-DMA with RSI(5) registering a bearish extreme. If the price pops higher as it did in April, August, and November of last year, the Bulls may feel as though they’ve dodged a bullet. However, the Crude Oil market doesn’t have the fundamental support that other commodity sectors like base metals have, which could lead to an eventual breakdown toward the November low of $43.75/42.25.

While such a breakdown would hurt, price holding above the November low could indicate a longer-term consolidation lasting much of the year, which is when larger-range Fibonacci Retracement is best used. Either an immediate move back above the 200-DMA or hold of the November low would keep a neutral market still anticipating an eventual move back toward the upper $50/bbl region.

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