Crude oil closed at its highest level since July 2015 yesterday. This is obviously a positive, but is it a valid breakout and will higher prices be around the corner? We dove into the fundamentals, issues, and policies surrounding this important commodity in our latest Weekly Economic Commentary, but today we will take a look purely at the technical backdrop on crude oil.
First things first: The technical backdrop on crude oil is and has been bullish for quite some time. As the chart below shows, crude oil has completed a bullish inverse head-and-shoulders pattern, and as long as it stays above $50/barrel, this suggests potentially much higher prices. Remember, a head-and-shoulders pattern is a popular technical analysis pattern that forms at the end of major market moves and suggests the overall trend is changing. Given crude oil just had one of its worst bear markets ever, this is another step to a recovery and higher prices.
The other point that caught our attention is how rangebound crude has been. Per Ryan Detrick, Senior Market Strategist, “For weeks now, it seems like crude has closed around either $52 or $53/barrel, and that is because it has. In fact, the past nine weeks have been one of the tightest ranges in crude oil ever. The old saying is ‘don’t short a dull market.’ Well, there isn’t much out there more dull than crude oil right now.”
Think about this: Crude oil hasn’t closed up or down 2% for 13 straight days, the longest such streak since June 2015. Then over the past nine weeks, crude oil traded in a range of just under 9%. This has only happened 6% of the time historically, and the last time it took place was July 2014, right ahead of the 75% drop in the following 19 months into the February 2016 lows. The good news is the two times before July 2014 when we saw a similar tight range, the prices were higher a year later. In December 2012 and November 1995, crude oil traded in a similar tight range as now and was up a year later 11% and 33%, respectively.
There is no doubt that the technicals on crude oil remain firmly bullish, but the other side to the analysis shows there is no question that untapped U.S. supply could put a cap on any major rallies. We aren’t bearish on crude oil here and overall think a move higher is possible, but it will likely be capped near $60-$65/barrel. We will continue to monitor this important asset class should anything change.