Key Points:
- The recent oil rally seems to be running out of steam.
- Technical bias is firmly favouring a reversal.
- OPEC meeting is drawing nearer which could see heightened volatility.
We have seen oil prices make a substantial recovery over the past few weeks, largely erasing the rout following a breakout from the long-term rising wedge structure. Nevertheless, we are reaching what could be a near-term peak for the commodity as the technical bias is once again being felt and capping upsides.
Specifically, the downside constraint of that wedge is once again in sight but, this time, it is likely to be presenting substantial resistance as opposed to support. Due to this, we expect to see the current rally stall shortly, especially given that 61.8% Fibonacci level is drawing nearer and is also intersecting the trend line just above the commodity’s current price. However, whilst this is a strong argument for a cap on gains, it doesn’t necessitate the decline in prices that we have forecasted on the below chart.
Fortunately, we can look to a number of other technical readings and see that, in fact, we may indeed be about to enter yet another period of notable losses. In particular, the movement of the stochastics into overbought territory is suggesting that some selling pressure is needed in fairly short order. Furthermore, we can also see that, despite the recent upswing, the EMA configuration is highly bearish and the 100 day average is also well positioned to reinforce resistance around the 49.73 handle.
If the above technical forecast does ring true, we can expect to see losses extend to around the 46.03 level. At this price, the combination of a historical reversal point and the 23.6% Fibonacci level should prove to be a near-term trough for oil. Of course, this assumes that OPEC’s attempts to collude don’t implode spectacularly in the interim – an outcome that isn’t entirely impossible. If we do have such a breakdown in the cartel’s coordination, we might see the commodity well and truly below the $45 mark fairly rapidly.
Ultimately, keep an eye on oil as it has been offering some fairly reliable technical moves over the past few weeks and it is likely to be in focus given that the OPEC talks are coming up next week. This could mean additional volatility is on the cards which presents an opportunity to net some pips amid the heightened headline risk.