Crude oil prices were stable at the time of writing, but after Thursday’s sharp drop it remains to be seen whether prices will be able to recover a bit further or resume lower, given that we have now had the first major bearish price action in months. I reckon the risks are skewed to the downside from here.
Until now, crude oil and other key commodities such as corn and soyabean prices have been on the rise, primarily driven by investor optimism over an improving demand outlook due to the rollout of the Covid vaccines which has raised the prospects of lockdowns being lifted for good. The reason why we have seen an outsized recovery for oil is threefold. First, prices have risen from a very low base after that historic drop to negative in the May futures contract last year. Second, the OPEC+ alliance have restricted oil supply by amounts never seen before, causing the oil market to tighten sharply. Finally, the demand outlook has improved with the major economies rolling out Covid vaccines, raising hopes that lockdowns will end and travel will resume to more normal levels from around the second of the year.
But going forward, oil is likely to struggle in my view – and the downward momentum may have already started following last week’s sell-off. While I think demand is going to improve further as more economies ease travel restrictions in the coming months, the impact of this will be offset to some degree by rising oil supply. The OPEC+ will be easing supply restrictions slowly, while US shale production is likely to ramp up due to the attractive oil prices again. All told, I can’t see oil prices rising significantly further. I think Brent will struggle to stay above $70 and reckon WTI is going to average around $60 per barrel in 2021.
In the short-term, prices could correct themselves given last week’s sell-off causing a bit of technical damage. While prices steadied on Friday, with Brent finding support from the trend line, it also broke its prior low of $62.40:
Source: ThinkMarkets and TradingView.com
If Brent oil were to go back below $62.40, then an eventual drop to the next psychologically-important level of $60 could be on the cards next. Potentially, oil prices could even fall further lower with $55 an attractive target where the 200-day moving average confluences with the longer-term trend line.
Short-term resistance is seen around $64.70 (which was being tested at the time of writing), followed by the base of last week’s breakdown at $66.80 next.
While the chart does look bearish, a clean move back above that $66.80 resistance could nullify the bear argument in the short-term. So that is the line in the sand for me.