Crude Oil Outlook:
- Consensus has formed that the COVID-19 omicron variant won’t weigh significantly on global growth, an important development for energy markets.
- Now back in the uptrend from the November 2020 and August 2021 lows, the near-term outlook is higher for crude oil prices.
- According to the IG Client Sentiment Index, crude oil prices have a mixed bias.
Growth Concerns Fade, Oil Rises
The performance of crude oil prices over the past 10 days is an extremely encouraging development for risk appetite, thanks in part to the signal it sends about global growth. As mentioned numerous times previously, the correlation between quarterly global oil production and quarterly global GDP is a robust +0.97 over the past 30-years. Thus, as financial markets have determined that the COVID-19 omicron variant outbreak won’t lead to a significant obstacle for global growth, oil prices have been given the all-clear signal to resume their climb higher.
Oil Volatility, Oil Price Correlation Still Normal
Crude oil prices have a relationship with volatility like most other asset classes, especially those that have real economic uses – other energy assets, soft and hard metals, for example. Similar to how bonds and stocks don’t like increased volatility – signaling greater uncertainty around cash flows, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. Oil volatility has plummeted over the past 10-days, unsurprisingly clearing the path for higher oil prices.
OVX (Oil Volatility) Technical Analysis: Daily Price Chart (December 2020 to December 2021) (Chart 1)
Oil volatility (as measured by the Cboe’s gold volatility ETF, OVX, which tracks the 1-month implied volatility of oil as derived from the USO option chain) was trading at 40.11 at the time this report was written. The 5-day correlation between OVX and crude oil prices is -0.87 while the 20-day correlation is -0.90; and one week ago, on December 23, the 5-day correlation was -0.94 and the 20-day correlation was -0.89.
Crude Oil Price Technical Analysis: Daily Chart (November 2020 to December 2021) (Chart 2)
Early last week it was observed that “price action felt like a wash out of sorts, with prices falling back to the 23.6% Fibonacci retracement of the November 2020 low/October 2021 high range before rebounding sharply. The near-term upside bias may be to the topside, with a return to the December highs at 73.34 possible.” Crude oil prices have not only cleared 73.34, they have returned above the uptrend from the November 2020 and August 2021 lows with vigor, hurdling the July high at 76.98 as well.
The near-term technical outlook for crude oil prices is clearly bullish. Daily MACD is rising through its signal line, while daily Slow Stochastics are holding in overbought territory. Crude oil prices are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. The next target higher would be the pre-omicron pivot, established at the November 24 high at 79.23.
Crude Oil Price Technical Analysis: Weekly Chart (January 2008 to December 2021) (Chart 3)
In mid-December it was noted that “until the uptrend from the November 2020 and August 2021 lows is hurdled, then traders may want to have a cynical view towards any rally in crude oil prices.” The cynical view is no longer warranted, as crude oil prices have cleared several key levels of technical resistance in recent days. With crude oil prices above their weekly 4-, 8-, and 13-EMA envelope, which is in bullish sequential order, traders may eye further gains when the calendar flips to January 2022.
IG CLIENT SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (December 30, 2021) (CHART 4)
Oil – US Crude: Retail trader data shows 52.68% of traders are net-long with the ratio of traders long to short at 1.11 to 1. The number of traders net-long is 2.87% lower than yesterday and 16.36% lower from last week, while the number of traders net-short is 4.45% lower than yesterday and 7.74% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil – US Crude prices may continue to fall.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Oil – US Crude trading bias
— Written by Christopher Vecchio, CFA, Senior Strategist