By :David Scutt, Market Analyst
Crude oil appears toppy after a mammoth rally since February, unable to push higher despite some seriously strong tailwinds stemming from geopolitics, supply curbs and ongoing strength in the US economy. While there are obvious fat tail risks that could lead to substantial price spikes, if they don’t materialise, it suggests crude may need to move lower before moving higher again.
Crude oil underpinned by strong macro tailwinds
Blockages of shipping routes in the Middle East, potential damage to energy infrastructure from conflict, additional sanctions on Iran impacting global supply. Those risks are now partially priced into crude oil which, along with ongoing supply curbs from OPEC members and Russia, have contributed to a 22% rally since early February.
While they’re unlikely to dissipate soon and could lead to huge upside if the geopolitical situation were to worsen, the recent price action has not been overly bullish, in part due to a stronger US dollar and concerns the Fed may keep interest rates unchanged well into the second half of 2024, increasing the risk of an economic.
But price action has been suspect recently
Twice WTI has ventured above $87.50 this month only to be knocked lower, including a sizeable reversal last Friday. While it continues to find bids on dips below $84.70, the inability to push higher has seen the price squeeze up against uptrend support today. While it’s only a minor trendline, it can be used to base trade ideas around, depending on how the price evolves.
Should it break lower as the price action since last Friday’s inverted hammer would suggest, traders could sell below $84.70 looking for an unwind to $83 or even $80.30. A stop loss order just above the uptrend would provide protection against reversal risk.
Even though long positions held by traders are not yet at extreme levels, according to the latest COT report, there has been an uptick in recent weeks, adding to the risk that downside could initiate forced selling among those who recently joined the rally.
Even though near-term risks appear skewed to the downside, if the price doesn’t play ball the idea can be flipped around, allowing for traders to buy the dip with a stop below $84.70 for protection. The initial target would be the double-top at $87.65 with $89.50 the next level after that.
Managing near-term headline risk
From a fundamental perspective, geopolitical developments will continue to play an outsized roll in dictating price, so make sure your stops are placed so that they limit the damage if the trade moves against you, especially if going short.
Among known events, US crude oil inventory will be released by the energy Information Administration later Wednesday. Markets look for a modest build with stocks of gasoline and distillates expected to decline.
– Written by David Scutt
Follow David on Twitter @scutty
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