What's Next for Crude Oil Price? / Commodities / Crude Oil

From the unimaginable lows, crude oil isshaking off the dust. Moving higher, can it rise like a phoenix?

Before moving to thetechnical part of today’s analysis, it seems that a quote from yesterday’s OilTrading Alert would be appropriate:

Crude oilwas just trading below 0. Well, not completely, but the nearest futurescontract was trading below 0 for the first time ever.

In case you missed it,here’s the screenshot from finance.yahoo.com and yesterday’s price quote as itwas falling.

Crude oilwas just trading below 0. Well, not completely, but the nearest futurescontract was trading below 0 for the first time ever. Ridiculous, right? Well,yes, and no. It’s not that ridiculous if you take into account bigger supplydue to earlier OPEC+ disagreement and lower demand due to Covid-19. Producershave to produce crude oil on a daily basis, because shutting down production iscostly. One cannot store oil just anywhere and the facilities designed for itwere already getting full. This means that people were unwilling to buy it,because it was not really possible to store it. To encourage people to buy it(and take delivery) anyway, producers paid extra instead of charging per barrel– more than $30 per barrel.

Sure, itwas just the May contract, which expires today and the delivery is next month.The following futures contracts (the ones that expire in the following months)are priced at about $20 or higher. But will they be able to remain as high? Themarket thinks that the situation will somehow be resolved within a month. Butwill this really be the case? If not, we could see something similar onceagain.

Crazytimes, and economic history in the making.

Since the situation in the futures market istoo unclear right now, our chart analysis will focus on the most popular crudeoil ETF, the USO ETF.

This is what we wrote in our yesterday’s Oil TradingAlert:

(…) What’s next?

Taking into account thismonth’s breakdown not only below the thin red line, but also below the lastmonth’s low, we think that further deterioration may be just around the corner.

How low could the USO go ifthe sellers move on?

In our opinion, the firstdownside target will be around 3.36, where the lower border of the orangedeclining trend channel currently is. Nevertheless, if it won’t stop the bears,the next support could be around 2.90, which is where the lower border of thered declining trend channel currently is.

From today’s point of view, we see that theoverall panic in the oil marked took the USO ETF not only to our downsidetargets, but also below both support lines.

After a fresh 2020 (and also an all-time) lowof 2.31, the ETF pulled back quite sharply, which shows that the bulls were active around thementioned price level. Thanks to this price action, the USO moved to thepreviously broken lower border of the red declining trend channel. Unfortunatelyfor the bulls though, this could be just a verification of the earlierbreakdown.

Should it be the case,another move to the downside and likely a fresh low (maybe even around0.50-0.70), is a strong possibility.

Nevertheless, if the bulls show strength onceagain (similarly to their rebound from yesterday's lows) and manage toinvalidate the above mentioned breakdown (closing the day above 2.90), anattempt to close the gap created at the beginning of yesterday's session wouldn’tsurprise us.

Before summarizing, let’s keep in mind thatthe ETF rose in pre-market trading. Coupled with all the yesterday-discussed technical signs (the bullishdivergences, indicators’ posture and the similarity to what we saw in the past)could trigger further improvement and a test of the lower (or even the upper)border of yesterday’s gap.

However, in our opinion, it is too early tosay that the worst is already behind the bulls, the USO ETF and the oil market.The rush to open any positions can easily prove premature.

Summing up, whileit seems that crude oil might drop some more before rebounding, it might alsobe the case that the short-term outlook turns bullish if crude oil successfullytests the previous lows. After Monday’s enormous and unbelievable profits incrude oil, it doesn’t appear that opening new positions right now is justifiedfrom the risk to reward point of view. Soon, it might be though.

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Nadia Simmons
Forex & Oil Trading Strategist
PrzemyslawRadomski
Founder, Editor-in-chief

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