WTI OIL WEEKLY FORECAST: SLIGHTLY BEARISH
Oil prices have charged higher in recent days, but the rally could start to fade soon
If the correction in the equity space deepens, we could reach a point where everything sells off, including most commodities
The FOMC meeting may become a bearish catalyst for all risk assets in the week ahead
Last Friday, when oil (WTI) was trading near the $84 handle, I discussed the possibility of a brief decline. From those levels, crude briefly rose to $87.90, but then quickly fell to $82.81tracking weakness in the stock market, before rebounding and settling around $84.75 just before the weekend.
For the coming days, I am still inclined to believe that we are due for a temporary pullback. Although the medium-term outlook for oil is undisputable bullish on account of supply and demand imbalances, rallies don’t always follow a straight line and WTI has risen more than 35% since the December low.
At the same time, sentiment has soured considerably on Wall Street lately on Fed jitters and concerns about the slowing economy. If the correction seen in the equity space were to deepen, we could reach a point where everything sells off, including most commodities.
The bearish scenario could play out after next Wednesday’s FOMC decision. While no change in interest rates is expected, the central bank may offer insight into the tightening cycle in the face of red-hot inflation. If policymakers remain overly hawkish, investors could begin to price in a policy error, become spooked and dump all kinds of risk-assets, sparking a retracement in both WTI and Brent, although any downside move is likely to be temporary.
Last but not least, with WTI near $85 per barrel, the White House may soon begin discussing further actions to curb rising prices, such as a possible ban on exports. Although no action to stop international shipments is likely to be implemented, the mere talk of it could trigger a sharp downward movement in crude oil.
Turning our attention to technical analysis, WTI is now testing a key resistance near the $85.00 psychological level. If buyers are rejected from those levels, we could see a pullback towards support at $83, though a dip below this floor could accelerate the decline and pave the way for a fall towards $81.50, just before the $80 area comes into play.
Alternatively, if bulls charge higher and manage to push the price above $85.00, the yearly high at $87.90 would become the immediate upside focus. Traders should watch this area very closely because a climb above it could attract new buyers and fuel a rally towards the next relevant resistance at $91.30, a level that has not been tested since September 2014.
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—Written by Diego Colman, Market Strategist & Contributor