ICE Brent Crude pressing support

At Tricio we look at charts in order to gauge investor sentiment and behaviour. Sometimes though we lean against the charts, if we believe that our fundamental or ‘market experience’ view has more merit than trend or momentum. This is always nervy of course, as the trend and momentum aspect of price moves are usually how the ‘crowd’ feels about that market. Who are we to think that everyone else is wrong?

To be fair, we don’t do it often, but in my experience commodity markets, especially oil, tend to see price swings that when you think about it seriously, may not persist. Gold has their gold bugs always cheering higher prices. Oil has naysayers who think that renewables will make this energy source obsolete, and of course has its backers who tend to come out of the woodwork with extreme bullish forecasts (no further supply, escalating demand) whenever prices start to clear $120/bbl. 

Back in the late 1990’s ICE Brent Crude futures were pressing well below $20/bbl. and at times below $10/bbl. This was below the cost of production for most North Sea majors and if memory serves, only Saudi Arabia had a cost of production below $20/bbl. at that time. The market was bearish for all of the right reasons, but the low price suggested that this was unsustainable – either production would be curbed or demand would increase (or both).

When prices spiked higher in 2008 and 2022 our mantra was ‘high prices cure high prices’. There were good reasons for both spikes above $120/bbl., but at those prices oil consumption was likely to be curbed, other energy sources might become relatively more attractive and exploration and development of oil fields was likely to increase. The elevated prices in 2011-2014 were a bit more of a puzzle, as the uptrend stalled out but the market remained bullish. This eventually unravelled in a historic price drop, which finally hit our forecast of lower prices!

Now? We have been looking for oil prices to break below $60/bbl. and set up an approach to $45/bbl. for a few years now. The chart above (weekly) shows the red arrow pointing to a price target near $36/bbl. on a simple breakout extension from the consolidation pattern (symmetrical triangle?). The key of course will be turning below $60/bbl. on a sustained basis.

Short-term traders may be leaning the other way, betting that the risk of a peace breaking out between Russia and Ukraine is unlikely at this time. If peace doesn’t break out, the narrative may return to what sanctions the US (and others) may ramp up on Russian energy firms or oil distribution.

The news that US President Trump is imposing a blockade on sanctioned oil tankers transporting Venezuelan oil saw oil prices rise in early trading on Wednesday, with traders taking action on the ‘sizzle’ ahead of really looking at the ‘steak’. The knee-jerk reaction (higher prices) runs into the hard analysis from many research firms that Venezuelan sanction-only oil being about 300,000 barrels per day, leaving around 600,000 bpd of Venezuelan oil to continue flowing. In other words, not enough to really shift prices higher for long. Things could become trickier for oil bears if the ‘sizzle’ increases, such as a US invasion of Venezuela and stepped up regime change moves, of course.

We take a medium to long-term view and think that Saudi Arabia will continue to try and discipline OPEC+ production by turning on the taps. The US ‘drill, baby, drill’ energy policy is easy to understand, and should keep oil production bumping along record highs there. The real risk is that oil prices collapse to $20/bbl. and lower again, if supply increases more than expected (Venezuelan oil returns to the main market along with Russian oil?) over the next few years. Watch the 13 and 50-week moving averages as resistance now ($63.50/bbl. and $68/bbl. area, respectively) ahead of the top of the consolidation pattern near $80/bbl. All else being equal, a drop to $45/bbl. and perhaps to the $25/$20 per bbl. area is still seen as the big risk in this market.

Gerry Celaya, Chief Strategist