A new high is reached even as this article is being written. WTI Crude has breached 104.0 and is now trading at around 20 cents above the 104 USD per barrel mark. This is the highest price has managed to reach since May 2012, and the mark of bullish breakout from 98.0, which has been acting as a strong ceiling for price action in 2013.
The rally is also fundamentally supported – demand in crude oil has increased significantly, as evident by the sharp drop in past week’s inventory numbers. The unrest in previously Syria and now Egypt also provided upwards pressure as concern of stable and smooth supply of crude oil took a beating. The best evidence that demand in crude is increasing healthily, is the fact that OPEC has increased output since July, but the price of Crude continue to remain highly bullish. Looking at Brent Crude, prices has also been rallying strongly for the past week. Brent prices are definitely not as high as early 2013, but we have cleared the 106.0 resistance convincingly, with price currently trading at 108.0. This solidifies the claim that global demand is increasing, as it shows that the price rally is not localized. Earlier in the year we did see WTI rally, but the same gain wasn’t noticeable on Brent – and the end result was that price tanked significantly back in April. With both Brent and WTI moving in tandem, current rally appears to be more sustainable as compared to before.
That being said, it is impossible for price to move in a single direction without any form of reply/pullback. Looking at short-term chart, we can see that such a potential pullback may be currently underway. Price is facing resistance from Channel Top, while Stochastic readings are Overbought and suggest that a bearish cycle may embark soon. If technicals signals are correct, a move back towards Channel Bottom closer to 103.0 will be possible, but that will not necessary invalidate the bullish breakout seen on Weekly nor even impair current short-term uptrend, hence continuing to fit nicely in our long-term bullish narrative.
With Department of Energy inventory report coming in later during US hours, price may find the fundamental reason needed to push lower should inventories decrease less than expected. Analysts expect a decline of 3.2 million barrels, but the number may turn out to be smaller considering that numbers almost never meet expectations exactly, with the last occurrence happening on 7th Nov 2012. Hence volatility should be reasonably expected. This would also mean that price may also have the chance of breaking current rising Channel for a stronger bullish acceleration should inventory numbers fall greater than expected. Given current bullish sentiment, it is entirely possible that we could see overreaction on bullish news, but under-reaction on bearish news. The true bullish litmus test however, would be a case where price manage to breakout of 104.5 in spite of weaker inventory numbers. This would imply that bullish sentiment is strong, but then again the resulting pullback may be equally if not greater as the rally would be more based on speculative rather than fundamental supports.
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