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Is Crude Oil Poised For Breakout? Checking the Charts

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November 1, 2017
Is Crude Oil Poised For Breakout? Checking the Charts
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Investors hear a lot about crude oil, in part because it underpins so much of the economy. Falling oil supplies can often signal demand, and the price of oil can sometimes have ramifications for various stock sectors.

For a little over a year now, crude oil has been trading in a range between roughly $42 and $55 a barrel, unable to break out of that range in either direction. Recently, prices have edged higher – holding above the psychologically important $50 a barrel level for more than two weeks – and some analysts and chart-watchers see growing signs hinting that range-bound price action may end soon.

International Supply Factors Give Oil a Boost

First, let’s consider the supply and demand perspective. When both OPEC and Russia pledged to extend crude production cuts in May 2017, prices initially spiked, then quickly gave back their gains and more as investors seemingly doubted the resolve of producer nations to stick to their quotas. However, since bottoming in late June, prices have risen more than 20%, and here are some of the factors supporting the gains:

  • Despite initial doubts, in August, OPEC recorded the highest ever level of quota compliance by its members.
  • The ongoing threat from Turkey to close any oil pipelines into the country from Iraq that are administered by the Kurdistan Regional Government.
  • Disruptions in US oil production – specifically a drop in rig counts - due in part to Hurricane Harvey.
  • A strong global demand for oil in Q2 reported by the International Energy Agency, which recently upped its estimated daily consumption level for 2017 by 1.6 million barrels.

The OPEC/Russia production cuts are supposed to expire in March, but Russian president Vladimir Putin said earlier this month that the cuts could be extended to the end of next year. This sentiment was echoed by Saudi Arabia’s Crown Prince Mohammad bin Salman last Thursday when he told Reuters, “We are committed to work with all producers, OPEC and non-OPEC countries. We will support anything to stabilize the oil demand and supply.”

U.S. Production, Exports A Possible Wildcard

Despite all the bullish tailwinds for crude, there is one major factor that threatens to keep a lid on prices – the emergence of the U.S. as a major exporter.

Due to technological advances like fracking and a decades-long drive toward fuel efficiency, the U.S. has greatly curtailed its importation of oil. In fact, according to the U.S. Energy Information Administration, just last week, exports of US crude, diesel, and petroleum products hit an all-time record of 7.66 million barrels per day.

In addition, US production jumped 11% week-over-week to 9.51 million barrels per day, the largest weekly increase since September 2012, and crude stockpiles increased by 856,000 barrels – marking a four-week high.

Charting Time

With such mixed signals in the fundamentals, it wouldn’t be unreasonable to assume that crude could continue to trade in this range for some time to come. But if you look at the technical picture — represented by crude oil futures (/CL) in the chart below — there does seem to be a slight bias higher, which could lead to a potential breakout to the upside.

Crude Oil

FIGURE 1: RANGE BOUND.

For over a year, U.S. crude oil has traded between $42 and $55 a barrel, but is now approaching the upper end of that range. Data Source: CME Group. Image source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Checking back on historical data, oil fell hard in 2015 and early 2016, then rallied before settling into a range between $42 and $55 per barrel. This type of extended sideways trading could be a signal that neither buyers nor sellers have enough firepower to break the range – yet.

Though it has been here before, crude is trading in the upper end of the current range, and both the short-term and intermediate-term technical trends appear to be up. This could be a sign that the market believes OPEC is likely to agree to extended production cuts when it meets next on Nov. 30 in Vienna.

Of course, it’s also possible that no matter what OPEC decides, the $55 level may continue to act as resistance and crude could continue its meandering ways going forward. And despite recent strength, the clear takeaway from both the fundamental and technical picture is that crude is still in a range. But it bears watching, as a move outside that range — in either direction — could signal the beginning of a new trend in oil and have a trickle-down effect on other sectors.

If oil indeed climbs out of its current range, the next technical test might be the $60 a barrel level, which is near where oil topped out in mid-2015. The energy sector could be worth watching if oil starts to climb, because energy companies often benefit on both top and bottom lines from higher oil prices. Consumer discretionary is another one to keep an eye on, because higher gas prices can sometimes lead to people spending less on other goods. The airline, rail, and trucking industries could also find it more challenging to pull in profits if they have to start paying up for fuel.

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