Technical Headwinds for Crude Oil

Crude oil prices are up nearly 300% after their historic drop below zero in April. The global economy came to a near-standstill with flights grounded, ships anchored, and drivers revving up their Zoom accounts instead of their engines as consumers and businesses do their best to fight the Coronavirus spread. This had detrimental impacts to the energy commodity market, which ultimately lead to its breaking point of costing more to sell oil than to buy it.

While still well off its 2020 high, oil is back at a level that feels more ‘familiar’ – not negative or in single digits! However, while price has appreciated in recent months, it’s come to a point where the headwinds have begun to build, making it a little harder to continue its attempted new trend higher.


First up is a simple weekly chart of crude oil going back to 2015. The $41.50/barrel level for oil has been an important area of support over the last five years, testing it several times with the only serious break below coming in late ’15 before recovering a few months later with several tests of support following, showing the level continued to hold significance. And then 2020 happened. We sliced right through $41.50 and never looked back as the economy shutdown and demand dried up. As oil recovers, we’re back at this historically important level once again, but this time as potential resistance. So often in technical analysis we see resistance and support levels flip, what was support – drawing in buyers – becomes resistance – becoming more attractive to sellers.


Next up, well zoom in a bit and look at the daily chart for this year. We can see the large gap down that happened on March 9th occurred right at the $41.50 level. Gaps in price can create their own form or resistance and support, noting the significant shift in sentiment by aggressive buyers and sellers causing the gap in price.

Looking at momentum, the 14-day Relative Strength Index (RSI) has held up 50 during the slight dip in price over the last month, not making any major lower lows. I’m watching how momentum acts from here, if we can hold the prior lows and let price digest these strong gains from April, or if we see RSI break under 55, taking out the current two lows created in June.

The bottom panel of the chart below shows the Daily Sentiment Index (DSI) % Bullish for crude oil. Currently, there’s 70% bullishness towards black gold, off the high set above 80% earlier this month. Like momentum, sentiment has yet to make a lower-low, holding above 63%, but it has made a slight divergence with a lower high.

The daily chart shows that price is at a crossroads. We either see momentum and sentiment break down, causing price to potentially fall back under $30/barrel or this one month consolidation between $40 and $34 builds up enough demand to get price moving towards $50, clearing the gap created back in May.

Trader Positioning

The last chart for crude oil I want to share is of the COT data for the commodity, specifically the Small Trader and Commercial Trader positions. Rather than look at the raw long and short positions, the chart below looks at each net position in comparison its historical percentile. As of last week, Small Traders and Commercial Traders are in strong disagreement in their views on crude. While Small Traders are at 90.5%tile, Commercials sit near their low historical average of just 20.7%tile. We haven’t seen a spread like this since 2014 before crude dropped from $97 to $30. This isn’t to say that crude will make the same type decline, but shows the significance of the spread in positioning of these two trader groups and often it’s the Commercial Traders that have their trading bias proven correct.

So where does crude go from here? I think the next move will be important as I’d be surprised if this short-term consolidation continues throughout July. The data seems to suggest the bears have a slight edge, based on the drop in sentiment and the positioning of the Commercial Traders, but if price action can get a sustained break above $41.50, maybe we’ll see the Commercials begin to move off their low exposure and sentiment firm up.

From a macro lens, it’s hard to ignore the rising infection data for the Coronavirus as several states have begun to tighten their re-opening policies. If we do see a national or global second wave of the virus, it’s tough to imagine that oil won’t take a hit once again as demand heads for the exits like we saw earlier this year. I’m keeping an open mind to the next leg for crude and if we do see another economic shutdown, it doesn’t necessarily mean oil prices will move back to being negative, but it will surely be hard for them to rise above and hold their current levels.

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