Crude oil prices remain stuck in a trading range
West Texas Intermediate (WTI) and North Sea Brent remain in a tight trading range. Both have been forming higher lows and lower highs, in what is commonly know as a Symmetrical Triangle or Pennant technical pattern. The tight trading range indicates an equal draw between the bulls and the bears.
In the case of WTI, crude prices fall when they reach a ceiling price of $110, but find support somewhere in the $85 to $90 range.
For Brent, prices turn negative above the $115 level. Brent has managed to maintain strong support at the $100/barrel level, bouncing off that floor for the past 2 years.
Fundamentally, both a bullish and bearish case can be made for the price of crude . . .
The bullish case:
- slowing production out of mature oil fields, which as Saudi Arabia, Mexico and the North Sea
- fast depletion rates in production from US shale, such as the Bakken and Eagle Ford deposits
- the threat of sanctions against Russia over their presence in the Ukraine
- political instability in Libya and Iraq and the potential for spillover to other oil producing countries
- A growing middle class in India and China which would increase global oil demand
- declining US inventory levels.
The bearish case:
- growing North American supply, which will eventually exceeding domestic consumption rates
- lower gasoline consumption in developed countries, such as Canada, US and Europe
- the threat of another widespread recession in Europe, which would further reduce demand
- improving oil extraction technology, allowing for improved oil recovery
- the potential for new developments in oil-rich areas such as the Arctic and US Atlantic coast
- a rising US dollar.
Clearly, investors are undecided on where oil prices are headed. Crude oil futures are currently in contango (i.e., longer term contracts are cheaper than near term contracts). This is generally bearish and would suggest that near-term prices are temporarily high due to political instability, but are set to fall going forward.
Symmetrical Triangle and Pennant formations are technically continuation patterns, which in this case would indicate a upside breakout. However, this particular formation has been developing over a period of several years, which is excessively long and not a good sign. Investors are cautioned to wait for a breakout before making any assumptions.