Crude Oil Outlook:

  • Growth concerns around the omicron variant are causing oil prices to collapse.
  • A break out of the November 4 low would put crude oil prices on a course towards their channel support throughout the year, approaching 71.00.
  • According to IG Customer Sentiment Index, crude oil prices have a bearish bias.

Crude Oil Prices Burn Then Bounce Back

It has been a month since we last checked crude oil prices, when it was observed that “It looks like a potential double top may be forming.” Indeed, a double top played out in the weeks that followed, but the setback was even deeper than expected: the unexpected arrival of the omicron variant of COVID-19 sparked fear of global growth. Global demand for oil is strongly correlated with global GDP, and the return of bottlenecks and restrictions on economic activity – particularly in Europe – is therefore weighing on energy prices.

The turning point in the second half of December has welcomed new growth concerns as COVID-19 infection rates skyrocket in the euro area, the UK and the US. Recent price action in crude oil markets warns of further potential short-term declines, despite today’s hammer blow to a key Fibonacci retracement. Given that COVID-19 infections are expected to continue to rise over the next several weeks, it seems highly likely that the road ahead remains difficult for crude oil prices; intermittent relief gatherings are plausible, however.

Oil volatility, oil price correlation still normal

Crude oil prices relate to volatility like most other asset classes, especially those with 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 about cash flow, dividends, coupon payments, etc. – crude oil tends to suffer during periods of higher volatility. Oil volatility has skyrocketed in recent weeks at the expense of oil prices, as expected.

Technical analysis of the OVX (oil volatility): daily price chart (December 2020 to December 2021) (Chart 1)

Oil volatility (as measured by the Cboe Gold Volatility ETF, OVX, which tracks 1-month implied oil volatility as derived from the USO options chain) was trading at 60.27 at the time of writing. The 5-day correlation between the OVX and crude oil prices is -0.74 while the 20-day correlation is -0.91; and a week ago the December 13 the 5-day correlation was -0.26 and the 20-day correlation was -0.91.

Technical analysis of crude oil prices: daily chart (November 2020 to December 2021) (Chart 2)

Crude Oil Price Forecast: Omicron Fuels Weak Energy Markets

It was last noted that “it looks like a potential double top may be forming. Momentum continues to erode in the near term … a drop to 71.09 by the end of November would see crude oil prices revert to parallel uptrend support in place from the November 2020 and August lows 2021. ”Crude oil’s attempt to climb above the uptrend of November 2020 and August 2021 has been pushed back, and today’s price action has felt like a deregulation, prices Falling back to 23.6% Fibonacci retracement of high end Nov 2020 / Oct 2021 low before rebounding strongly.

The short-term bullish bias could be on the upside, with a return to December highs of 73.34 possible before the next lower step. The Daily MACD is still trending higher although below its signal line, while the Daily Slow Stochastic is about to reach overbought territory. But given the current position of other momentum indicators – crude oil prices are below their daily EMA envelope, which is in a bearish sequential order – crude oil prices may have widened a new range with a support at 62.43.

Until COVID-19 infections accelerate to the point of shutting down Western economies again, 62.43 cannot be violated; However, until the omicron variant wave takes its course, it doesn’t seem likely that 73.34 will be exceeded either.

Technical analysis of crude oil prices: weekly chart (January 2008 to December 2021) (Chart 3)

Crude Oil Price Forecast: Omicron Fuels Weak Energy Markets

In mid-November, it was noted that “as long as crude oil prices do not lose 71.00 by the end of November, the uptrend for the year will remain valid, thus maintaining a buying mentality. the decline, even if the market falls. further in the short term. Well, crude oil prices fell 71.00 at the end of last month, shifting the mindset from ‘buy the trough’ to ‘sell the rally’. Until the uptrend from the November 2020 and August 2021 lows is hampered, traders may want to have a cynical view of any crude oil price rally.

IG CUSTOMER FEELING INDEX: CRUDE OIL PRICE FORECAST (December 20, 2021) (CHART 4)

Crude Oil Price Forecast: Omicron Fuels Weak Energy Markets

Oil – US Crude: Retail trader data shows 75.16% of traders are net long with a ratio of long / short traders at 3.03 to 1. The number of net long traders is 11.68% higher than yesterday and 4.97% lower than last week. , while the number of net-short traders is 4.45% lower than yesterday and 18.62% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that US oil and crude prices may continue to decline.

Traders are still longer than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US oil-crude counter-current trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist

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