Crude Oil Outlook:
- Crude oil prices are experiencing another volatile week as conflicting headlines dominate price action.
- In the past 24-hours, the Biden administration has announced that it is considering a rolling, daily release of oil from the Strategic Petroleum Reserve (SPR)
- According to the IG Client Sentiment Index, crude oil prices have a mixed bias in the near-term.
Many, Many Influences
Crude oil prices are experiencing another volatile week as conflicting headlines dominate price action. Concerns over the European Union banning Russian oil imports persist. The Iran nuclear deal appears close to the goal line. Security concerns around Saudi Arabian distribution facilities persist. And in the past 24-hours, the Biden administration has announced that it is considering a rolling, daily release of oil from the Strategic Petroleum Reserve (SPR) to counter the reduction of Russian supply in global markets.
As was noted at the start of the week in the weekly forecast, it remains the case that “there are several stories unfolding in the energy space that could easily provoke more volatility across markets, none of which are likely to find any permanent resolution anytime soon.” Volatile is a feature, not a bug.
Oil Volatility, Oil Price Correlation Remains Tight
Crude oil prices have a relationship with volatility like most other asset classes, especially those that have real economic uses – other energy assets, soft and hard metals, for example. Similar to how bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. Sustained heightened geopolitical tensions continue to translate into higher oil volatility, allowing for oil prices to move higher in an atypical manner that will continue for the foreseeable future.
OVX (Oil Volatility) Technical Analysis: Daily Price Chart (March 2021 to March 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 option chain) was trading at 59.27 at the time this report was written. Oil prices have been generally tracking oil prices since late-February, when the Russian invasion of Ukraine began. The 5-day correlation between OVX and crude oil prices is +0.71 while the 20-day correlation is +0.80. One week ago, on March 24, the 5-day correlation was +0.67 and the 20-day correlation was +0.86.
Crude Oil Price Technical Analysis: Daily Chart (March 2021 to March 2022) (Chart 2)
Crude oil prices continue to experience aggressive two-way price action, although with nascent signs that Russia and Ukraine are working towards a ceasefire, oil prices have eased from their highs in early-March. It’s possible that crude oil prices are beginning to consolidate into a symmetrical triangle, which in context of the preceding move higher, would call for a bullish breakout. But in this environment, dominated by spontaneous headlines on the news wire, it may be best of consider the symmetrical triangle a neutral pattern that could yield a breakout in either direction. The apex of the triangle will be reached by the second week of April, meaning a breakout back to the March high above 130 or back to the late-February low (base of the triangle) should occur sometime soon.
Crude Oil Price Technical Analysis: Weekly Chart (January 2008 to March 2022) (Chart 3)
On the weekly timeframe, there is evidence that momentum has stalled. Crude oil prices are still above their weekly 4-, 8-, and 13-EMA envelope, which is in bullish sequential order, but the decline now sees oil prices on the verge of retesting their weekly 4-EMA. Daily MACD’s ascent above its signal line is slowing, while weekly Slow Stochastics have already fallen out of overbought territory and are nearing their median line. If the aforementioned symmetrical triangle yields a breakout, it will likely be in a quick, violent manner that won’t necessarily be reflected on the weekly timeframe until after the fact; focusing on lower-term timeframes (4-hour, daily) seems appropriate for the foreseeable future.
IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (March 31, 2022) (CHART 4)
Oil – US Crude: Retail trader data shows 49.50% of traders are net-long with the ratio of traders short to long at 1.02 to 1. The number of traders net-long is 9.78% higher than yesterday and 10.69% higher from last week, while the number of traders net-short is 14.83% lower than yesterday and 15.32% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise.
Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed Oil – US Crude trading bias.
— Written by Christopher Vecchio, CFA, Senior Strategist