Chapter 44 10/23 WTI: Ambiguous Long and Short Signals, Prioritizing the Path with Minimal Risk
Summary: WTI Crude Oil continues to draw cues from the overall market sentiment, with ongoing risk aversion possibly exerting pressure on higher-risk assets. On the flip side, a return of risk appetite may imply an uptick in energy commodities.
Fundamenta
Oil prices saw a slight decline on Friday as the geopolitical tensions eased following US efforts to dissuade Israel from a large-scale military action in Gaza. Nevertheless, concerns over the conflict's potential escalation kept oil prices on an upward trajectory for the second consecutive week as of last Friday's close.
According to sources cited by Bloomberg, Israel initially resisted postponing what officials described as a substantial military operation to eliminate Hamas, but succumbed to US pressure to delay the military action. In recent days, Israel publicly altered the tone of its planned operation, suggesting a more limited approach to minimize civilian casualties.
The Israeli-Palestinian conflict also triggered frenzied activity in the options market as traders adjusted their positions to account for the risk of further surges in oil prices. Over the past month, the trading volume for call options has consistently exceeded that for put options.
We believe that even if the conflict escalates, it may not sustain price increases, as geopolitical risks have already pushed prices about $7 higher than their original levels. Data from the Chicago Mercantile Exchange's (CME) oil futures market shows traders added approximately 4,300 contracts over the weekend, reversing a multi-day bearish trend. Conversely, volume increased for three consecutive daily sessions, decreasing by roughly 182,300 contracts.
WTI prices retreated slightly from the weekly highs on Friday's close due to an increase in open interest contracts, suggesting the potential for further short-term declines. In other words, additional selling pressure should be expected near the monthly low point of around $81.50.
In addition to the conflict, the US Department of Energy stated last Thursday that it aims to purchase up to 6 million barrels of Strategic Petroleum Reserve (SPR) and will continue to replenish stockpiles following a record drawdown.
The department further indicated that it would continue to replenish reserves through monthly auctions, with the specific quantity yet to be determined. The Department hopes to secure contracts at $79 per barrel or lower, a price significantly higher than the earlier range of around $70 per barrel but lower than the current WTI crude oil price of $90 per barrel. The Biden administration has expressed the hope that its buyback strategy will yield a favorable return for taxpayers.
Technical Analysis
WTI crude oil has maintained an ascending wedge pattern since early October, forming higher lows and higher highs. The price is currently testing support and may potentially rebound towards the resistance level at $90.00 per barrel.
The 100 SMA is above the 200 SMA, indicating the path of least resistance is to the upside, and support is more likely to hold than to be breached. The dynamic turning point of the 200 SMA aligns with the wedge support, enhancing its strength as a bottom.
Furthermore, the stochastic oscillator is in the oversold region, suggesting that the bears appear exhausted and are starting to rise, indicating a return of upward pressure. Meanwhile, the Relative Strength Index (RSI) is also trending higher. Therefore, with the bullish momentum gaining strength, crude oil prices may follow suit. Continued upward pressure may even trigger a breakout of the resistance level and a rebound to a height consistent with the pattern.
On the other hand, breaking below the support near $85.29 could trigger a corresponding downtrend. In terms of trading strategy, going short at highs is recommended, with $88.49 as the key resistance level.
Trading Recommendations
Trading Direction: Short
Entry Price: 88.29
Target Price: 82.00
Stop Loss: 91.50
Valid Until: 2023-11-06 23:55:00
Support: 86.97, 85.72, 84.37
Resistance: 88.45, 89.14, 90.07
