Oil broke below a key support level in early April ($65.3/barrel on WTI, fig 1), before making a major low last week. Initially the weakness was on OPEC’s news (a larger than expected supply increase) and concerns, therefore, that OPEC is following ‘Trump’s orders’ (i.e. forcing the oil price lower). There was then more weakness on the tariff announcements, which was part of broader risk aversion in markets.
The key question is: How low can oil go? Is a relief rally starting? And what’s the longer term outlook?
Technically, oil had formed a pennant pattern (shown in fig 1). The break below the bottom of the pennant ($65.3) is therefore troubling for the bulls. Added to which, US/global growth is softening at a time when key producers have decided to bring back supply.
In the near term, though, the technical and positioning case for an oil price bounce is now reasonably robust. That is, various price based models have shifted to strong BUY (fig 1a), sentiment is bearish (a contrarian BUY signal), and portfolios are now well protected to the downside (with oil put to call ratio readings reasonably extreme, fig 1b). Elsewhere net LONG positioning has fallen to the lowest level in almost 13 years (fig 1c). Tactically, therefore, oil is attractive.
Fig 1: WTI oil price futures candlestick, shown with 50 & 200 day moving averages (US$/barrel)
Fig 1a: Medium term oil technical scoring system vs. Brent oil price (USD/barrel)
