Crude Oil Gets Over the Hump

Posted by jbrumley on September 25, 2017 2:14 PM

Almost a week ago we took a close look at a crude oil price chart, pointing out how it was close to a major breakout above a key technical ceiling around $50.40. It actually edged above that mark the very next day, though not decisively so. We like to see convincing moves to proverbially seal the deal.

That move came today, with the near-2% gain oil prices have achieved today, reaching a price of $51.66 per barrel.   Though we're likely to see a profit-taking pushback in the foreseeable future, the heavy lifting has been done.

The chart below speaks for itself. Crude prices tiptoed above $50.40 late last week, but left that mark in the dust today, making good on a bullish ramp-up effort that's been in development since the midpoint of the year.


It's not just the move above the ceiling at $50.40 that's so compelling, however. This is also the second thrust above the 200-day moving average (green) we've seen since July, and this one has taken hold. The move has also carried crude oil above a falling resistance line (purple, dashed) that's been in place since February's high.  

That's an awful lot of technical progress to ignore or just dismiss as coincidence.

It's not a perfect breakout effort, mind you. As was noted, even if higher highs are in store, we won't likely get there in a straight line.

One reason we suspect at least some sort of pullback is in store: Volume has been falling on the way up. If the rally is to last, it needs to gather rather than lose participants as it becomes more expensive to participate in it. Nervous investors may not want to risk jumping in now, but if the uptrend is rekindled after a pullback, traders may feel less worried about a meltdown. If the second wind plays out on growing bullish volume, it should last.

There's also the not-so-small reality that crude is in the habit of moving back and forth, regardless of the volume behind any ebb and flow.

Still, there are things underscoring just how seriously we should take this bullish thrust, as it's unfurling at a time when it arguably shouldn't be.

We mentioned a week ago that a falling U.S. dollar was working in favor of crude. Oil is priced in dollars, so the weaker the greenback is, the more it costs -- in dollars -- to buy a barrel of oil. Thing is, the dollar isn't falling today. It's up. Yet, so is oil... a testament to how bullish the oil undertow really is. It's not getting any help from the dollar, but is rallying anyway. Fanning those flames is word from OPEC that it's still serious about keeping its output tamped down, which in turns keeps the global supply of crude oil in check.

It's not a fault-free optimism. The consensus is that the balance of supply and demand is closer to the end of a rebalancing act than the beginning, suggesting there may not be a whole lot of upside left. That's an expectation that should be taken with a grain of salt though. What the market is doing is far more telling than what the onlookers suggest it should be doing, and with people putting real money on the line in anticipation of higher oil prices, it might be wise to at least acknowledge the possibility that most of the pros may be underestimating their long-term oil price outlooks. Much of the industry has been shuttered, but it could take months for that supply crimp to become fully evident. We may or may not be at that point yet.

In the meantime, the chart speaks for itself.