Is This The Start Of Another Major Rally In Oil?

U.S. West Texas Intermediate crude oil futures are trading slightly higher early Friday as traders attempt to claw back this week’s low. It’s been a volatile week with prices hitting their lowest level since February 25 only seven sessions after reaching an eight-year high on March 7. After making that move, prices have consolidated, which suggests traders may try to take another run at multi-year highs.

Fundamentally, the market remains well-supported by worries over both supply and demand. If the rally resumes, traders have to be prepared for a steady grind to the upside with the war premium created by speculative buyers essentially erased over the past two weeks.

Technically, the bearish closing price reversal top formed during the week-ending March 11 remains intact. Price-wise, the market reached the chart-pattern’s 50% - 61.8% objective last week at $92.20. Time-wise, however, we may see another 1 to 2 weeks for consolidation before traders make their next move.

The mixture of the fundamentals and technicals suggests that professionals are either accumulating futures contracts for the next rally, or distributing ahead of the next round of selling pressure.

War Premium Wiped Out But Weekly Uptrend Intact

Prices fell earlier in the week to their lowest level since February 25 on follow-through selling related to the previous week’s bearish chart pattern. The catalyst behind the move was directly related to peace talks between Russia and Ukraine. Furthermore, after a boatload of sanctions and a U.S. ban on Russian oil and oil products, there was very little news, which suggests traders had already priced in the worst case scenario.

The reaction to the ongoing peace talks was two-sided. Initially, prices fell after several news agencies reported that according to Ukraine officials, progress was being made toward ending the war. However, prices stabilized at mid-week after the Kremlin classified those comments as fake news while suggesting that peace talks were progressing slowly.

The WTI market topped out the previous week shortly after U.S. President Biden announced the U.S. ban on Russian oil. Speculative buyers treated the news as a “buy the rumor, sell the fact” situation and pounced on the opportunity to book profits, most likely handing the bag over to overaggressive retail traders chasing headline. Further selling was fueled by just the mere mention of peace. The two events essentially combined to erase the war premium that had been built in since the war began on February 24.

Further evidence can be seen on the daily chart. On February 24, the Russian invasion of Ukraine began. The next day on February 25, May WTI crude oil hit an intraday low of $88.49. Prices then began accelerating before reaching an eight-year high on March 7 at $126.42.

The subsequent sell-off drove price as low as $92.20 on March 16, or only $3.71 above the February 25 low. That $34.22 break from the contract high at $126.42 was close enough to say the war premium is off the chart at this time.

Weekly Technical Analysis

Weekly May WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart, however, momentum is trending lower, following the confirmation of the closing price reversal top from the week-ending March 11.

A trade through $126.42 will negate the bearish chart pattern and signal a resumption of the uptrend.  A move through $61.86 will change the main trend to down.  

The minor trend is also up. A trade through $80.25 will change the minor trend to down. This will confirm the shift in momentum.

Retracement Level Analysis

During the week-ending March 11, May WTI crude oil found resistance at $126.42, which was inside the longer-term retracement zone at $111.45 to $136.92.

The first minor range is $61.86 to $126.42. Its retracement zone at $94.14 to $86.52 stopped the selling this week at $92.20.

If the first retracement zone fails as support then look for the selling to possibly extend into the main support zone at $80.23 to $69.33. This is the last potential support zone before the $61.86 main bottom.

A new minor range has been formed between $126.42 and $92.20. Its 50% level at $109.31 is the primary upside target.

Weekly Technical Forecast

The direction of the May WTI crude oil market the week-ending March 25 will be determined by trader reaction to $109.31

Bullish Scenario

A sustained move over $109.31 will indicate the presence of buyers. If this move creates enough upside momentum then look for a test of the long-term 50% level at $111.45. This is a potential trigger point for an acceleration into the closing price reversal top at $126.42.

Overtaking $126.42 will negate the bearish chart pattern and could launch a rally into the long-term Fibonacci level at $136.92.

Bearish Scenario

A sustained move under $109.31 will signal the presence of sellers. This could lead to another test of the retracement zone at $94.14 to $86.52.

A failure to hold $86.52 will indicate the selling pressure is getting stronger. This could extend the weakness into the major retracement zone at $80.23 to $69.33. This is an important value area so we expect to see new buyers show up on a test of this area. Furthermore, new buyers will be trying to defend the main bottom at $61.86.

Short-Term Outlook

The confirmation of the closing price reversal top did not change the trend. All it did was encourage early long speculators to book profits. This pattern is not unusual since the first break following a prolonged rally in terms of price and time is typically long-liquidation.

Professionals tend to buy early then sell to retail traders who tend to react to the headlines. I think we are seeing that now. Retail traders are essentially trapped at high prices so professionals may try to trigger another pullback into support at $94.14 to $86.52 in order to shake out the weak longs before moving higher.

We will not be confident that a major top has formed until we see how traders react to a rally back to $109.31 to $113.35. This zone is very important to the longer-term chart structure.

A rally into $109.31 to $113.35 is likely to attract aggressive counter-trend sellers. They are going to try to form a potentially bearish secondary lower top. If successful then we’re likely to see lower prices over the next several weeks.

If buyers can blast through $113.35 then look for a retest of $126.42 or even more.

On the downside, since the fundamentals are bullish and likely to be this way moving forward as the sanctions against Russia and its oil industry start to do damage, buyers can take their time looking for a good re-entry level. The key area is $94.14 to $86.52. Buyers are going to try to form a potentially bullish secondary higher bottom inside this zone.

If $86.51 fails to hold then the buyers will step in again on a test of $80.23 to $69.33. They just don’t want to see prices fall below $60.00 a barrel.

Essentially, traders' reaction to $109.31 will set the tone next week.