Commodities Markets Analysis – Crude Oil 27th November 2020

*Live market analysis of the Crude Oil markets with my views on where trades might occur*

Welcome back to the blog. In this post I am going to run through my technical and fundamental analysis of the Crude Oil markets including higher timeframe bias and also intraday price movements. Right now, Oil prices are being pushed around by supply and demand volatility and uncertainty around future global travel and with OPEC looking at over production again and tensions rising, we could see more short term volatility soon.

Let’s start by looking at the higher timeframe weekly price chart and identify the key price zones in play right now and see how crude has recovered since the oil price crisis in April this year.

I want to point out that the charts below are the spot price for WTI crude oil and not the front month futures contracts which were the instrument that went in to negative pricing in April. Spot prices are the price for crude oil if it was to be settled and delivered immediately and not at a specific date in the future (hence the term futures).

Spot WTI Crude Oil weekly timeframe chart.

You can still see how far global oil prices fell in April with spot prices falling from highs of around $65.00 bbl in January to a low of $6.72 bbl in April. Since then price has naturally recovered and is now trading around the $45 bbl price level which is a gain of more than 550% from the yearly lows!

WTI Crude is approaching an interesting zone in regards to both technical and fundamental influences. Looking at the higher, weekly timeframe, price chart there are a few key confluences that could keep price from going much higher. Firstly, the $45 bbl price zone has previously acted as a support/resistance zone on multiple occasions keeping price from going higher and support price from falling lower. If you look back to 2016 and 2017 you can see the multiple price reactions with the zone.

Also coming in to play soon is the weekly 200EMA which is still aligned in a bearish trend direction with the 50EMA. This could act as a dynamic resistance for price. However in my opinion, and looking at past price reactions with this indicator, it has proved to not be an accurate and meaningful price resistance for spot crude.

All of my main technical analysis is shown on the weekly price charts including a bearish trendline across the previous main lower highs ($77 bbl and $65 bbl), multiple price support/resistance zones and EMA alignments.

Spot WTI Crude Oil 4 hour timeframe chart.

I have shown the 4hr intraday price chart above to show you the consistent recovery in the oil market since the multi-year lows were reached back in April. Price swiftly crossed above the 4hr 50EMA and then they 4hr EMA’s crossed and that saw price ride them up to the current levels around $45 bbl. The chart doesn’t really show much else but if we look at the front month futures prices you can see a completely different picture in terms of the price crash and the subsequent recovery.

From an intraday technical perspective I think this current breakout could see prices continue to rise and trade into the next higher timeframe price support/resistance zone at $52 bbl where the weekly 200EMA resides and the bearish weekly trendline approaches.

The WTI crude oil futures markets show a much more volatile picture. Not only did prices fall further in April leading to the negative prices but the more recent intraday trading sessions have been increasingly choppy. Since mid June price has been somewhat range bound between $43.50 bbl and $34.50 bbl and it is now looking like a breakout taking us to the current $45 bbl price.

Futures vs ETF Volatility.

If we take the prices from the front month WTI crude oil futures pricing and compare it to a popular WTI crude oil ETF from WisdomTree then we can compare the daily volatility levels using my VIX type indicator.

As you can see, not only was the price drop in April much deeper in the futures markets but the subsequent recovery has then been much larger. This contributes to increased volatility overall as can be seen by looking at the levels shown on the VIX indicator.

At its peak, the VIX indicator for the WTI crude futures prices recorded a level of more than 200 where as the WisdomTree crude oil ETF saw levels less than 50% of that at just below 60 on the VIX indicator.

From a fundamental perspective I think supply of crude is starting to creep up to “over supply” levels and that is why OPEC are looking at pre-empting another over supply issue that caused the negative prices back in April this year. Bank analysts are predicting that without another tapering of production then oversupply in 2021 will occur once more but this should not cause the same extreme price reactions as was seen this year.

Global demand for oil is still not back to pre-covid levels and that is going to remain a constant for some time however a swift delivery fo a successful vaccine could change this. China, the biggest importer of crude oil, is showing signs of strong demand and this is why short term futures prices and spot prices of oil are still rising. The vaccine hopes assist this because there is hope global travel increases next year. The lack of current demand will mean that supply of oil constantly needs monitoring and controlling and this will mean OPEC needs to stay on top of its’ game.

Brent oil futures are heading for a 5th consecutive week of price gains and shows no signs of stopping. Brent doesn’t tend to show as much price volatility as WTI crude thanks to differences in logistics and trade settlement. To learn more about crude oil pricing and the 2020 crude oil crisis, please read my previous blog post which can be found via the link below.

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