WTI Crude Oil: Signs of a Major Bottom as Futures Expiration Looms Again
Matt Weller, CFA, CMT May 18, 2020 5:49 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.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.