One of the most reliable cause-and-effect relationships in all of global markets is that violence in the Middle East tends to lead to a spike in oil prices.
As you might expect, the most direct explanation for this phenomenon comes from concerns about supply disruption in nearby oil-producing regions like Saudi Arabia, Iran, Russia, and the UAE. In addition, risk-averse firms also rush to hedge, or lock in, the current oil price fearing that it could rise further, and these actions can themselves push oil prices higher, becoming a bit of a self-fulfilling prophecy.
With all that said, oil’s recent failure to rally is particularly significant. Despite escalating violence between Israel and Gaza, not to mention the ongoing situation between Russia and Ukraine, WTI prices have actually fallen sharply over the past month. From an intermarket perspective, the rally in the U.S. dollar has certainly played a role in keeping oil down, but the lack of a meaningful rally in oil.
Technical View: WTI
Looking to the chart, WTI stalled out perfectly against the 78.6% Fibonacci retracement of its Sept.-Oct. drop at 107.70 last month, and rates have since fallen a full eight points to trade under the key $100 level. More broadly, the price action over the last four months has created a potential Head-and-Shoulders pattern; for traders who are not familiar, this classic technical pattern shows a shift from an uptrend (higher highs and higher lows) to a downtrend (lower highs and lower lows) and would be confirmed by a break below the neckline at 99.00.
While that support area is holding firm thus far today, the MACD indicator suggests that it could be in jeopardy. The indicator recently rolled over and is currently trending downward below both its signal line and “0” level. This development shows a shift to bearish momentum that could put a lid on any short-term bounces from 99.00 support. At the same time, the 50-day MA is also turning lower, suggesting that the medium-term trend is shifting to the downside.
For now, the Head-and-Shoulders is simply a pattern to monitor as long as rates hold above 99.00. However, with the always high-impact NFP report less than 24 hours away (stay tuned for our full NFP preview report later today), WTI could break this floor ahead of the weekend. If the pattern is confirmed by a break and close below 99.00, the next levels of support to watch will be 97.50 (61.8% Fibonacci support), .9600 (200-week MA, not shown), and 94.75 (78.6% Fib support). Meanwhile, the structure of the H&S pattern will remain intact as long as the pair says below the 50-day MA near 103.00.