Oil: V-Shaped Recovery Not on the Charts, but Rebound for Sure

The theory of gravity has been skewed in all sorts of ways since Isaac Newton’s experience with the apple some 350 years back, prompting financial markets to even come up with their own fanciful idiom: What goes down must come up.

In that spirit, some are already beginning to ask: Will oil, which sank like a stone last week, shoot up like a rocket now?

The week has already started on an ebullient note for oil longs, with Monday’s 3% rally and a further rise of 2% in Tuesday’s Asian trading.

The expectation for a commensurate rebound in crude prices after last week’s 11% plunge that took U.K.-origin Brent and U.S. West Texas Intermediate, or WTI, to December 2021 lows is understandable.

To oil bulls, this is a selloff that should have never happened — not when oil inventories remain nearly 240 million barrels below the five-year average in the OECD, the organization which groups 38 of the world’s most dynamic economies. 

That the plunge should occur after the energy-deficient European Union banned all imports of Russian oil in relation to the Ukraine conflict was mind-boggling to some.

And there are at least two major events to add to the list of positives on oil now: 

1. The formal closure since Friday of the 622,000 barrel-per-day Keystone pipeline carrying heavy Canadian crude to U.S. refiners in the Gulf Coast of Mexico after the worst oil spill in U.S. history.
2. The gradual reopening of Chinese cities locked down previously for coronavirus infections, as the world’s-biggest oil importing nation weans itself off a strict Zero-COVID policy.

These fundamentals aside, the consensus among oil’s technical chartists appeared to be that both WTI and Brent were oversold from the loss of nearly 2% a day on the average during six sessions between Dec. 2 and 9. 

Those shorting oil had their reasons though, and chiefly these involved fears of a recession in either the United States or Europe or both. Also, despite the perceived supply crunch in the OECD and EU, was the notion that there were more barrels in floating storage than immediately needed. 

Said Scott Shelton, an energy futures broker in Durham, North Carolina, who’s typically bullish on oil:

“Oil on the water [was estimated as] being extremely high [and] was a possible reason for the pause in buying.”

He said those long the market had “underestimated the amount of selling that [was] coming from the investor side as  their macro signals apparently are showing growing signs of a recession in the U.S.” 

Inventory data from the U.S. government’s Energy Information Administration, or EIA, also showed oil refiners building fuel supplies in a big way ahead of the winter, with stockpiles of new petroleum products outstripping that of crude oil last week.

• Crude oil inventories dropped by 5.187 million barrels during the week ended Dec. 2, the EIA in its Weekly Petroleum Status report. 
• Stockpiles of distillates — which are refined into diesel for trucks, buses, trains and ships as well as fuel for jets —  rose by 6.159 million barrels the same week.
• Inventories of gasoline — the top automobile fuel in the United States — grew by 5.320 million barrels.

Tuesday’s U.S. Consumer Price Index report for November and Wednesday’s Federal Reserve rate decision and 2023 outlook were also seen as a litmus test for oil’s rebound this week. 

An annual inflation reading sharply above the forecast 7.3% for the CPI and a Fed still highly concerned about inflation next year could further dent sentiment across risk assets, including oil, said analysts.

Will There Be an Uninterrupted Oil Rally?/h2

In such an environment, would it be plausible for crude prices to rise uninterruptedly all week, the same way they fell the previous week?

To answer this, we did a deep dive into the technicals of WTI with our regular collaborator Sunil Kumar Dixit of SKCharting.com and the conclusion we’ve come up with is: Perhaps not.

In Dixit’s own summation, oil traders should expect “a noisy rollercoaster ride rather than a V-shaped rally”.

In fact, the possibility was still there for the rally to reverse and extend WTI’s recent lows to $65 — a bottom not seen since December 2, 2021.

“With Friday’s session low of $70.11 seemingly acting as the bottom for WTI now, we’re working on a rebound that will first target the 5-week EMA of $77,” he said, referring to the Exponential Moving Average. “From there, the daily Middle Bollinger Band of $78.93 could kick in.”

Dixit said WTI’s Daily Stochastics of 29/21 were also positive while the Daily RSI, or Relative Strength Index, at 38 was beginning to look up even as it held below the neutral level of 50.

“A further consolidation above the daily Middle Bollinger Band of $78.93 will help an advance towards the 100-week SMA of $82,” he said, referring to the Simple Moving Average.

The weekly Middle Bollinger Band of $84.85 and the 50-week EMA of $88 will be the final resistance levels for WTI in the near term, added Dixit.

“While price action indicates a consolidation and stabilization above $70, any strong resistance from the major supply zones can trigger rejection causing corrections towards the support areas.

A retest of the 200-week SMA of $65 remains a possibility, which can hardly be ruled out.”

As for Brent, the EIA forecast last week that the global crude benchmark will likely average $92 per barrel for all of 2023 — which puts it nearly $15 above current levels.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.