The crude oil price trend had been stable in the past two months but volatility has returned in the last two weeks as the market dropped to a five-month low then quickly rebounded. Is it time for investors to buy the commodity or sell it short ahead of another retreat?
With traders having taken a pause as they awaited the outcome of the US election, is there now scope for prices to move out of the recent range? This crude oil price analysis looks at the drivers for the recent price moves and the analyst outlook for the market.
In addition, you can scroll down for a video in which Capital.com’s chief market strategist, David Jones, uses technical oil price chart analysis to set up a potential trade to profit from the market.
Oil price trend: will the market stage on a rebound with a Covid-19 vaccine?
The crude oil market has seen unprecedented volatility in 2020, with the US benchmark (WTI) contract starting the year around $65 per barrel and dropping to the negative territory in April for the first time ever. The market subsequently rebounded, and the WTI price trend has been comparatively stable at around $36-40 per barrel since. The market has been under pressure of late from expectations of rising supply, but news on November 9 of a potential Covid-19 vaccine pushed prices higher.
Production out of Libya has ramped up quickly following a ceasefire in the country’s civil war, increasing output from 80,000 barrels per day in August to around 800,000 barrels per day in early November. Members of OPEC+ – the Organisation of the Petroleum Exporting Countries (OPEC) and its partner countries – had been scheduled to taper off production cuts in the new year. But the latest news from OPEC+ suggests that the group is considering delaying the increase in production by 3-6 months or even introducing further cuts. OPEC+ is scheduled to meet on November 30 to make a final decision.
Demand remains below last year’s levels as the Covid-19 pandemic has disrupted industrial activity and transportation – the main consumers of oil – and an increase in supply before demand rebounds would pull prices down further.
Oil price analysis shows that the WTI price climbed from $35.79 per barrel on October 30 to $41.45 per barrel on November 11, as the prospect of the vaccine enabling economies around the world to reopen lifted demand expectations.
Now that the market has factored in the vaccine announcement, should investors “sell the news” or will oil prices rise?
Oil is unlikely to fall back to zero, but it could drop back to technical support at $37.25 per barrel. The market faltered after data showed that US crude oil inventories increased last week, rather than drawing down as forecast.
Watch this video for a comprehensive oil chart analysis from David Jones, the chief market strategist at Capital.com.
Where next for the oil market?
Technical indicators are not offering strong direction. The moving average convergence/divergence MACD has shifted to a buy signal since the low at the beginning of November, whereas the relative strength index (RSI) is heading towards overbought for the first time since June.
There has been strong resistance at $42 per barrel since September, which the market was unable to break through even with the boost from the vaccine news. That could indicate the market is likely to retreat, suggesting a short position with a stop loss above $42 per barrel would be profitable. Alternatively, waiting for the market to retreat to $38 before opening a long position would limit losses on continued weakness. If the market is able to break through its resistance, the next level to watch would be $44 per barrel.
Weak demand is likely to continue to exert downward pressure on the market. The International Energy Agency has revised down its global oil demand outlook by 0.4 million barrels per day (mb/d) in the third quarter, 1.2 mb/d in the fourth quarter and 0.7 mb/d in the first quarter of 2021. It has revised down its forecast for 2020 and expects demand to decrease by 8.8 mb/d in 2020, compared with 8.4 mb/d previously. It expects demand to rise by 5.8 mb/d next year, up from a previous forecast of 5.5 mb/d, noting that vaccines are unlikely to substantially lift demand until well into 2021.
“There is almost belief that we will see demand for oil kick in in the second half of the year, assuming a vaccine is approved,” noted Phil Flynn, an analyst at the Price Futures Group. If trial results remain positive, “oil traders will start pricing in that possibility now, giving oil support against the short-term risk of more second wave shutdowns”.
However, “the market will struggle to break the September high at $46.50/oz before demand begins to recover,” wrote Ole Hansen, head of the commodity strategy at Denmark’s Saxo Bank, in his latest oil price analysis. “The [vaccine] news may also make it more difficult for OPEC+ to agree on a deal to postpone the planned January production hike.”
With demand remaining low, any upside in the oil price trend will be largely driven by changes to supply. Analysts at Canadian investment bank TD Securities said: “OPEC+ still holds the key to support the market in the immediate term, while the prospect of a vaccine and further stimulus offer hope on the demand front, ultimately keeping the Great Rebalancing underway.
“When combined with overly negative sentiment, OPEC+ support and rising demand expectations – particularly in the context of a potential vaccine – we see some room for the rally in energy prices to run in the near-term.”
Daniel Hynes, senior commodity strategist at Australian bank ANZ, also noted: “There are major hurdles to overcome before the oil market can assume the worst is over.
The most recent WTI oil price forecast from ANZ has WTI averaging $42 per barrel by the end of the first quarter and Dutch Bank ABN Amro similarly forecasts a price of $43 per barrel. That would leave it little changed from the current $40 per barrel level and indicate the strength of resistance at $42 per barrel.
What is your view of the crude oil price forecast? If you are looking to trade on rising volatility in the market you can do so through contracts for difference (CFDs) at Capital.com.
Trading CFDs offers the opportunity to try to benefit from both bullish and bearish price action. You can either hold a long position, speculating that the oil price will rise, or a short position, speculating that the price will fall.
Trade US Crude Oil Spot CFD
However, note that CFDs are a leveraged product, therefore profits, as well as losses, are magnified.
You can learn more about CFD trading with free online courses and find out how to trade WTI oil CFDs by reading our comprehensive guide. Once you are ready, create a trading account at Capital.com and stay up-to-date with the latest oil price predictions to help inform your trading decisions.