Oil Rally Exceeds Expectations
A few months ago, in late March, our crude oil analysis had called for a bottom in WTI oil prices. Back then Crude oil was trading at $32.26 a barrel. In the article back then we noted that from a technical perspective, Oil prices were likely to outperform over the period, calling for an upside target to $42.
It is now anyone's guess that Oil prices have since early April embarked in a bullish rally. Despite the setback from the failed OPEC negotiations where producers failed to reach an agreement to cap production, Oil prices managed to hold their ground. The markets still remain over-supplied. Although one can argue that the updated bullish forecasts for Oil from renowned agencies such as the Energy and Information Administration (EIA) and OPEC itself are reasons enough to believe that oil will push higher, both these agencies have been upgrading their forecasts that oil demand will start to pick up but the bottom line is that supply continues to outstrip demand. Read more on the previous research note on Crude Oil here.
Oil prices managed to get a brief support from the wildfires in Canada and supply disruptions in Nigeria and Libya. However, these short term blips in production don’t quite justify the strong rally in Oil we have seen so far.
Another piece to the puzzle has been the US dollar's price movements as well. While the dollar has managed to steadily decline thus supporting higher oil prices, we have seen that the greenback is just about getting ready to resume another leg higher. While it is hard to tell how far and for how long the dollar will start to appreciate, combining the fundamentals and the technicals, the current rally in oil is likely nearing its peak. Therefore, there is reason to believe that oil prices might decline sooner rather than later.
Looking to the technical chart, you can see the strong uptrend has managed to send prices clearing the $44.95 - $42.02 level of resistance. Oil prices briefly tested highs of $49.26 just last week, sending markets into a frenzy that $50 will not be hard to achieve. Some analysts have even upgraded their forecasts on oil noting that $60 is likely over the next few months.
But the technical chart shows that it could be difficult to expect oil prices to rise to $60, although that still remains our main and final target. Unless there is strong support established near the $44.95 - $42.02 level, there is possibility that oil prices could slip lower in the near term. Although prices briefly pulled back to the falling or descending wedge pattern right after breaking out, a more conclusive test of this support is required if we expect Oil to move higher. Therefore, it is very likely that oil prices could see a decline in the near term back to the $37 - $38.50 handle. Establishing support here could then see a meaningful rally for oil to finally break and invalidate the $44.95 - $42.02 level of support/resistance and eventually continue its rally to the $60 handle.
For traders, this can be a great opportunity to renew their bullish bets on crude oil. The overall expectation of the price action in oil is likely to unfold over the second quarter and mid – third quarter. In other words, expect to see a pull back in oil prices ahead of what could be a very strong correction to the $60 handle.