Oil prices edge higher at the start of the new trading year

WTI crude oil reached $80 last week on the back of a solid start to the new trading year. An inverse head and shoulders pattern points to more upside and a new high above $85. 

The price of oil had one of the most interesting reactions during the COVID-19 pandemic. First, it crashed at the start of the pandemic, as the world’s economies went into full lockdown mode.

Moreover, it settled into negative territory for the first time ever, as clearinghouses allowed futures contracts to settle below zero. Oil was seen at -$40 at some brokers or somewhere around that level at some others.

Second, it bounced even more aggressively than it crashed. The rally was so aggressive that the WTI crude oil price kept making new higher highs and higher lows until it reached massive resistance at the $85 area.

And then it corrected.

The news that a new COVID-19 variant spreads faster than the previous one triggered a sharp correction in the price of oil. In fact, not only the price of oil declined, but other risky assets too, such as the US stock market.

But the news was quickly downplayed by the fact that hospitalizations were not rising as in the previous pandemic waves. In other words, the markets overreacted, and so markets bounced back.

While the equity markets made new all-time highs in December, oil did not. However, the technical picture looks bullish due to an inverse head and shoulders pattern.

Inversed head and shoulders pattern points to new highs

The WTI crude oil price found support at the $62.50 area. After sliding more than $20, it bounced in December as investors piled back into risky assets.

While the inverse head and shoulders pattern looks different than the textbook material one may find, it looks appropriate in markets with high volatility – and the WTI crude oil is such a market.

It appears that it is just a matter of time until the price of oil makes a new higher high above $85. Because the oil price is the main driver of inflation, central banks will have difficulty responding to oil trading above $85 in 2022.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *