Crude Oil Outlook:
Fed, Omicron, and Ukraine – Still
For higher or for worse, the important thing drivers behind the latest surge in crude oil costs stay in place. The Federal Reserve’s signaling that it’ll elevate rates of interest rapidly this 12 months are undergirded by the truth that the US economic system is in fine condition and might face up to coverage tightening.
For oil costs, robust financial progress offsets considerations about greater rates of interest, a minimum of within the near-term. This was substantiated earlier at the moment when the 4Q’21 US GDP report handily beat expectations, exhibiting that the COVID-19 omicron variant wasn’t producing as vital of a drag on progress circumstances as feared. The demand facet of the equation, to say the least, appears resilient.
Moreover, sustained and rising amongst Russia, Ukraine, the United States, and Europe (the EU and the UK) are scary considerations concerning the provide facet. It stays the case that there’s “a speculative supply-demand imbalance that could see global energy demand outstrip supply in a meaningful manner should the war of words escalate into boots on the ground,” as famous in final week’s replace.
With influences on each the demand and the availability facet prone to stay alongside their present trajectory for the foreseeable future, the elemental argument for greater oil costs stays intact, alongside a continued bullish outlook from the technical perspective.
Oil Volatility, Oil Price Correlation Askew
Crude oil costs have a relationship with volatility like most different asset lessons, particularly people who have actual financial makes use of – different vitality belongings, mushy and laborious metals, for instance. Similar to how bonds and shares don’t like elevated volatility – signaling larger uncertainty round money flows, dividends, coupon funds, and many others. – crude oil tends to undergo in periods of upper volatility. But heightened geopolitical tensions are throwing off the standard relationship between oil costs and oil volatility.
OVX (Oil Volatility) Technical Analysis: Daily Price Chart (January 2021 to January 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 choice chain) was buying and selling at 45.45 on the time this report was written. As was the case final week, “with tensions in Eastern Europe escalating – threatening to reduce short-term energy supplies – the uptick in volatility in recent days has coincided with higher oil prices.” The 5-day correlation between OVX and crude oil costs is -0.29 whereas the 20-day correlation is +0.45. One week in the past, on January 20, the 5-day correlation was +0.89 and the 20-day correlation was -0.31.
Crude Oil Price Technical Analysis: Daily Chart (November 2020 to January 2022) (Chart 2)
In a way, as a result of bullish momentum has remained agency, the near-term technical outlook for crude oil costs stays intact. Daily MACD is rising above its sign line, whereas every day Slow Stochastics are holding in overbought territory. Crude oil costs are above their every day 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Of word, crude oil costs haven’t closed beneath their every day 13-EMA since December 20, 2021, suggesting a ‘buy the dip’ mentality is finest suited. The subsequent swing goal greater is the OPEC+ fiscal breakeven stage of 92.00.
Crude Oil Price Technical Analysis: Weekly Chart (January 2008 to January 2022) (Chart 3)
Last week it was reaffirmed that “crude oil prices have cleared several key levels of technical resistance in recent days. With crude oil prices above their weekly 4-, 8-, and 13-EMA envelope, which is in bullish sequential order, traders may eye further gains when the calendar flips to January 2022. This view has been strengthened through the first three weeks of the year, and traders may be well-suited to continue to look for further crude oil strength in the near-term.”
IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (January 27, 2022) (CHART 4)
Oil – US Crude: Retail dealer knowledge exhibits 35.80% of merchants are net-long with the ratio of merchants quick to lengthy at 1.79 to 1. The variety of merchants net-long is 5.44% greater than yesterday and 11.94% decrease from final week, whereas the variety of merchants net-short is 3.12% decrease than yesterday and 9.41% decrease from final week.
We usually take a contrarian view to crowd sentiment, and the actual fact merchants are net-short suggests Oil – US Crude costs might proceed to rise.
Positioning is much less net-short than yesterday however extra net-short from final week. The mixture of present sentiment and up to date adjustments offers us an extra combined Oil – US Crude buying and selling bias.
— Written by Christopher Vecchio, CFA, Senior Strategist
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