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Where Will Oil Bottom? Looking to the Charts for Clues

By Mike Zaccardi, CFA, CMTCommoditiesNov 28, 2022 06:54AM ET
www.investing.com/analysis/where-will-oil-bottom-looking-to-the-charts-for-clues-200632850
Where Will Oil Bottom? Looking to the Charts for Clues
By Mike Zaccardi, CFA, CMT   |  Nov 28, 2022 06:54AM ET
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CL
-1.07%
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XOP
-1.58%
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XLE
-1.35%
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OIH
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  • Energy stocks outpace the broad equity market
  • Crude oil has fallen to its lowest price since January, now down year-on-year
  • Possible long-term support on the chart, potential bullish fundamental catalysts

It has been a banner year for energy. The Energy Select Sector SPDR (XLE) is higher by 66% so far in 2022 while two other, more niche, funds are positive by handsome amounts, as well. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has returned 50%, including dividends, while the VanEck Oil Services ETF (OIH) sports a 57% advance.

Not surprisingly, the recent plunge in oil prices has resulted in more sanguine inflation outlooks among traders.

Energy Equities Continue to Work Despite Lower Oil

XLE Daily
XLE Daily

Source: StockCharts.com

As of the close last Wednesday, both the 5-year forward breakeven inflation rate and the “5y5y” which measures expected inflation over the five-to-10-year horizon stood just above 2.3%—near the lowest figures in the last year. The rosier outlook for consumer prices comes after October’s better-than-expected CPI report that sent stocks soaring. But a new factor now comes into play that could keep a lid on rising costs across the economy and the world.

Inflation Expectations Cooling: Near 2.3% Next 10 Years

5-Year Breakeven Inflation Rates
5-Year Breakeven Inflation Rates

Source: St. Louis Federal Reserve

West Texas Intermediate crude oil ended last week at its lowest closing price since Jan. 3. Likewise, wholesale gasoline futures settled at the lowest weekly level dating back to the first month of 2022. Oil is now modestly negative from a year ago even with four-decade-high inflation rates and ongoing turmoil following Russia’s invasion of Ukraine.

Oil Futures: Down 3% Year-on-Year

Oil Futures
Oil Futures

Source: TradingView

Let’s home in on where oil might go from here. Is there much more room to the downside? If so, where’s a good spot to start nibbling long again?

I see important support in the $62 to $66 range. Notice in the chart that WTI has significant volume by price in that zone. That is also where the top end of WTI’s 2019 through early 2020 range highs were seen. Finally, there were a pair of pullbacks to the low $60s last year—the presumption is that that area attracted buyers then, and it will do so once more.

Eyeing WTI Support in the Low to Mid-$60s

WTI Daily
WTI Daily

Source: StockCharts.com

The bearish technical case for oil is that its long-term 200-day moving average is now rolling over and the shorter-term 50-day moving average is decidedly negatively sloped. After failing to notch a new high back in the second quarter, momentum has been on the side of the bears. A failure at climbing above the mid-$90s is another pain point. If we see a bounce in the low to mid-$60s, expect some resistance near $76.

Fundamental support could come from a reopening in China or even the U.S. administration seeking to take advantage of lower prices by refilling the Strategic Petroleum Reserve which is the most depleted since March of 1984.

Bullish Catalyst: Refilling the SPR

SPR Levels
SPR Levels

Source: ZeroHedge, Bloomberg

The Bottom Line

I see further downside ahead for WTI oil prices. The key commodity settled at a fresh weekly closing price dating back to January on Black Friday and is now negative on an annual basis. Look for support in the low to mid-$60s.

Disclaimer: Mike Zaccardi does not own any of the securities mentioned in this article.

Where Will Oil Bottom? Looking to the Charts for Clues
 

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Where Will Oil Bottom? Looking to the Charts for Clues

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Comments (10)
kristi smith
kristi smith Nov 28, 2022 4:49PM ET
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won't that make has go down?¿?? If so, great. and I'm as play some puts
Alan Rice
Alan Rice Nov 28, 2022 3:38PM ET
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OPEC+: Inexpensive oil is the root of MOST evil.
Owusu Michael
Owusu Michael Nov 28, 2022 11:45AM ET
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good evening how are you please
Chris Gonzales
Chris Gonzales Nov 28, 2022 11:05AM ET
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close to bottom of SPR
emad hijazi
emad hijazi Nov 28, 2022 10:17AM ET
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I think we are at the bottom
Jimmy Doodoo
JimmyD Nov 28, 2022 10:17AM ET
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And what makes you say that?
Deepu Singh
Deepu Singh Nov 28, 2022 9:59AM ET
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oxy
John Berry
John Berry Nov 28, 2022 9:45AM ET
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Great article..I agree. Oil to low 60s before the next climb over 100
Gonzalo Ribeiro
Gonzalo Ribeiro Nov 28, 2022 9:40AM ET
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bottom's around 65. Loading up on OXY and KOS if that happens
amt hun
amt hun Nov 28, 2022 9:33AM ET
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This dude looks like Sebastian Kurz (former PM of Austria)
Son Nguyen
Son Nguyen Nov 28, 2022 9:32AM ET
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WTI 65-68
 
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