From a fundamental point of view, oil maintains a very positive medium-term outlook. The resilience of demand as the global economy recovers from the COVID-19 crisis, tight supplies amid OPEC+ reluctance to increase production quotas much faster, and falling inventories are all bullish catalysts for the crude market.

Another near-term tailwind is the global energy crisis. With coal prices near record levels and natural gas prohibitively expensive after its 2021 spike, some countries are temporarily switching to oil for power generation and heating, a situation that may boost demand for both WTI and Brent and provide further impetus. Against this backdrop, oil is likely to cruise higher during the latter part of the year, although the move will not follow a straight line, as new concerns about rising coronavirus cases in Russia, China and Germany may dent appetite for riskier assets from time to time.

From a technical standpoint, the WTI oil structure is also quite bullish, with price trading above key SMAs and printing higher highs and higher lows in an impeccable fashion since last year. Even though the current pattern points to further upside, traders should exercise caution for two reasons:

price is approaching critical resistance near the $84.00 psychological markthe 14-week RSI currently offers an extreme overbought reading as shown in the chart below


Source: TradingView

The two factors mentioned above may create the right conditions for a brief pullback and subsequent sideways consolidation before the next leg higher. That said, traders should prepare for a possible retreat towards $80 and wobbly price action around those levels over the next week. In the event of a larger pullback, the first support to watch for appears at $80.75, followed by $79.80/79.40. A move below this floor could accelerate selling pressure and trigger a correction towards a rising trendline extended from the August lows, which now crosses the $77.50 region.


Source: TradingView

Alternatively, if oil does not take a breather and continues to charge higher undeterred by stretched positioning, it is imperative to surveil how price reacts in the $84 area as a decisive climb above this barrier could pave the way for a sustained rally towards $91.00, the next technical resistance to monitor (see weekly chart).


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—Written by Diego Colman, Contributor

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