A higher slow and steady grind, but the red flag appears
Crude Oil Outlook:
- The news that the delta variant is proving problematic has introduced a new layer of uncertainty in the markets.
- Having already crossed both the 2020 high (65.65) and the downtrend line from the July 2008 and June 2014 highs, it looks like we are still at the start of a major bottom-up effort.
- According to IG Customer Sentiment Index, crude oil prices have a mixed bias.
Crude Oil Prices Float Up; Caution
Wwith global demand increasing at a breakneck pace after the pandemic and OPEC + keeping production cuts in place for the foreseeable future, short-term supply-demand imbalance remains a viable catalyst for more gains in crude oil prices. News emerged on Tuesday that the OPEC + joint technical committee ended its meeting without even discussing possible production increases.
Historically, changes in the demand for crude oil follow global growth with an almost perfect correlation, so as long as the bullish scenario of global growth persists, energy is expected to be in high demand as OPEC + continues to reduce demand. offer.
Having already crossed both the 2020 high (65.65) and the downtrend line from the July 2008 and June 2014 highs, it looks like we are still at the start of a major bottom-up effort. It should be noted, however, that recent developments in the relationship between crude oil price and crude oil volatility warn that upward float may soon be hampered.
Relationship between oil volatility and oil price reversals
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.
The increased uncertainty in the financial markets due to the increase in macroeconomic tensions decreases the theoretical demand for energy; signs that the global economy is recoveringrcoming out of the coronavirus pandemic reduces uncertainty, and therefore volatility. The news that the delta variant is proving problematic has introduced a new layer of uncertainty in the markets.
OVX technical analysis (oil volatility): daily price chart (June 2020 to June 2021) (Chart 1)
Oil volatility (as measured by the Cboe Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility as derived from the USO options chain) was trading at 47.93 at the time of writing. Oil volatility persist around levels lived since 2019.
However, the oil price action and changes in the structures of volatility terms after the June Federal Reserve meeting saw the typical relationship of crude oil price and oil volatility shift; in fact, this is the first sustained positive correlation between crude oil prices and volatility since March, which marked a near-term high for crude oil prices. It’s a red flag for bullish traders.
The 5-day correlation between the OVX and crude oil prices is -0.44 while the 20-day correlation is +0.08; and a week ago the June 22 the 5-day correlation was -0.37 and the 20-day correlation was -0.07.
Technical analysis of crude oil prices: daily chart (June 2020 to June 2021) (Chart 2)
In the crude oil price forecast in early June, it was noted that “crude oil prices broke a symmetrical triangle over the daily period, decisively erasing both the 2020 high (65.65) and the descending trend line of July 2008 and June. The highs of 2014… more gains may be to come. After hitting new annual highs last week against the backdrop of the uptrend of the swing lows of April 2020, November 2020 and May 2021, the technical posture remains bullish.
As a potential red flag, the changing relationship between crude oil volatility and price suggests that traders should be on the lookout for a change in technical conditions around crude oil prices. Note that the daily 8-EMA has not been breached on a close-out basis since May 21; a break below here would be an indication that a short term top is forming. For now, crude oil prices are above their daily envelope of 5, 8, 13, and 21 EMAs, which is in sequential bullish order (albeit only barely). The Daily MACD tends to move lower well above its signal line, while the Daily Slow Stochastic is just starting to move away from overbought territory.
Technical analysis of crude oil prices: weekly chart (January 2008 to June 2021) (Chart 3)
In previous crude oil price predictions, it was noted that “keeping in decisive territory, improvements in the technical structure over shorter time frames suggest that a breakout attempt may soon emerge… so the breakout has arrived; the rally to the 2018 high of 76.90 has started. While the 2018 high was not reached, it stands to reason that a pullback to lower time frames should be considered for potential opportunities to enter (or re-enter) the market on the long side. Until the pandemic uptrend breaks, there is no good technical reason to be bearish.
IG CUSTOMER FEELING INDEX: CRUDE OIL PRICE FORECAST (June 29, 2021) (CHART 4)
Oil – US Crude: Retail trader data shows that 48.01% of traders are net buy with a short / long traders ratio of 1.08 to 1. The number of traders net buy is 3.07% lower than yesterday and 36.35% higher than last week. , while the number of net-short traders is 1.16% lower than yesterday and 7.62% lower than 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 more net-short than yesterday but less 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 Currency Strategist