Crude oil has been a volatile market as huge increases in domestic production due to a fracking revolution and the OPEC decision—led by Saudi Arabia—to not cut production last fall in the face of rapidly dropping prices led to a massive downward move.
The market has appeared to have bottomed earlier this spring as the more than 50% drop in prices led to production cuts. The rise in skirmishes throughout the Middle East has increased the risk premium on the market.
Perhaps it is a little silly to talk about technical factors with all this going on, but we noted earlier in the year how WTI crude oil prices had rallied sharply in the closing hours of the last trading day of January to settle above a 17-year trendline that was previously broken. That was followed in February and March by a retest of that important price level. The market activity around the close of each month in the first quarter indicated that this was a significant price level. However, we drew that trendline along the low points touched in 1998, 2001 and 2009. Since we are looking at monthly closes, we decided to redraw that trendline.
If we recreate that trendline touching on the monthly low closes—rather than the absolute lows—then that major trendline was not only breached in January, but the market has remained below that long-term benchmark up until it breached it earlier this month (see chart below). Currently that trendline is sitting approximately at $60.50. This means that crude may have another important technical battle here in the last week of May.
A close above that level could confirm a low has been set and we are in a new longer-term bull market in crude; a close below that level could mean the recent rally has been a strong correction, but there is a chance of retesting this spring’s low. Either way, that area should serve as strong resistance throughout the week.