Crude Oil Outlook:
- NOTIn the second week of October, new annual highs were found again – in fact, the highest levels since October 2014.
- VSCoarse oil prices are now + 8.02% above their daily 21-EMA, which is the biggest differential since March 5, when they were + 9.61% above their 21-EMA daily.
- According to IG Customer Sentiment Index, crude oil prices have a mixed bias.
Crude Oil Prices Hit New Highs
The last time we inquired about crude oil prices end of September, it was noted that “it is our baseline scenario whereby the persistent imbalance of supply and demand that defined energy markets throughout 2021 will continue, which keeps the fundamental bullish argument intact for the next few months. As a result, while a break to new annual highs could be imminent for crude oil prices, there is a short-term warning sign to be concerned about. “
This is because crude oil prices moved sideways for a few more days after our September forecast update before finally hitting new annual highs, and now, in the second week of October, new highs. annuals were found – in fact, the highest levels since October 2014.
While the fundamental argument continues to be bullish, some technical concerns have arisen that suggest the recent rally in crude oil prices is starting to look excessive, in line with recent episodes that have coincided with short-term highs for the past few days. That is, if crude oil prices were to retreat soon, that would always create another opportunity to “buy down”.
Relationship between oil volatility and oil price normalization
Crude oil prices relate to volatility like most other asset classes, especially those with 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 about cash flow, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility.
OVX technical analysis (oil volatility): daily price chart (October 2020 to October 2021) (Chart 1)
Oil volatility (as measured by Cboe’s Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility as derived from the USO options chain) was trading at 39.15 at the time of writing.
The 5-day correlation between the OVX and crude oil prices is -0.41 while the 20-day correlation is +0.71; and a week ago the October 4 the 5-day correlation was +0.23 and the 20-day correlation was +0.65.
Oil volatility persist around levels going back to 2019, suggesting normal price action in energy markets (despite what the headlines suggest otherwise).
Technical analysis of crude oil prices: daily chart (October 2020 to October 2021) (Chart 2)
The technical structure of crude oil remains generally constructive. Crude oil prices are above their daily envelope of 5, 8, 13 and 21 EMA, which is in a bullish sequential order. The Daily MACD continues to expand its rise above its signal line, while the Daily Slow Stochastic remains in overbought territory.
But even though crude oil prices jumped earlier in the week, the rally is starting to look sparkling in the near term. Spot prices are now + 2.7% above their daily 5-EMA: Recent highs in crude oil prices appeared on September 15, September 27 and October 5, when crude oil prices were above- above their daily 5-EMA of + 2.63%, + 2.54% and + 2.64%, respectively.
Additionally, crude oil prices are now + 8.02% above their daily 21-EMA, which is the biggest differential since March 5, when they were + 9.61% above. of their daily 21-EMA. March 5 was the peak in crude oil prices for nearly three months. A series of profit-taking could be around the corner.
Technical analysis of crude oil prices: weekly chart (January 2008 to October 2021) (Chart 3)
At the end of September, it was noted that “another bullish movement is expected before the end of the year. As such, the longer-term technical posture remains bullish. A doubling of the multi-month side-range (76.98-61.56) suggests a measured move up to 92.40, putting crude oil prices on track to reach the OPEC + budget balance of 92 , 00 before the end of the year. Crude oil prices could hit an inflection point in the near term, however, with the back of the uptrend line from the November 2020 and May 2021 lows coming into play at 82.60 during the week to to come.
IG CUSTOMER FEELING INDEX: CRUDE OIL PRICE FORECAST (October 11, 2021) (CHART 4)
Oil – US Crude: Retail trader data shows 36.66% of traders are net-long with the ratio of short / long traders at 1.73 to 1. The number of net-long traders is 16.99% higher than yesterday and 7.47% lower than last week, while the number of net-short traders is 7.09% higher than yesterday and 18.78% higher than last week last week.
We generally take a contrarian view of crowd sentiment, and the fact that traders are net short suggests that US oil and crude prices may continue to rise.
The positioning is less net-short than yesterday but more net-short than last week. The combination of current sentiment and recent changes gives us a new mixed US Oil – Crude bias.
— Written by Christopher Vecchio, CFA, Senior Strategist