Crude Has Broken Out of Its Range: What’s Next?

A couple of times over the last few weeks, I have pointed out here that crude was looking for a direction. It has been trading in a narrowing range, and in that situation any breakout beyond the initial support or resistance usually proves quite significant. That is not because of any technical signal, but rather because a breakout in those circumstances suggests that the market has decided where its focus should be. In this case, the problems in banking here in the U.S. and now in Europe with Credit Suisse have grabbed their attention, bringing as it does echoes of 2008.

As a result, crude has broken lower and is trading at levels not seen since the end of 2021. That inevitably prompts the question, how low can it go?

In the short-term at least, the answer to that question can be seen by looking at a two-year chart…

The $61.50 level, marked here by the blue line, is the next logical support for WTI futures (CL). It held three times on retracements in 2021, which is long enough ago to reduce the significance of the level, but three touches of a support do give it some power. Overall, especially given that the breakeven level for quite a few shale wells and fields is around there too, it does look like it could be relevant again should we get there.

Whether we do or not, and more importantly what happens if we do, is probably dependent on factors outside of oil, though. As it stands, the banking problems look to be contained. Credit Suisse has been in trouble for a while (the stock has dropped close to 90% over the last two years as liquidity issues have persisted) and the two banks that have been taken over by the Fed are heavily involved in small tech and crypto, two areas that have seen some significant revaluation over the last year. These could, therefore, easily be isolated problems that have been offset by quick central bank actions.

The problem, though, is that while that is a logical conclusion, financial markets are built on confidence, and confidence is a function of emotion, not logic.

Assuming, though, that there is no overwhelming panic over the next few weeks, the rest of the news and data are actually quite supportive of oil's prospects. Even as the Bank of England warns of a recession in that country, the numbers in the U.S. remain strong, and China is still being boosted by the bounce back from their zero-covid era. If, and it is a big if, the relative strength in those two countries is enough to avoid a full-on global recession, then oil in the $60-75 range makes more sense that a complete collapse.

Getting back to the original question regarding how low oil can go, the honest answer is that it is too early to tell. That may seem like a bit of a cop-out, or unsatisfying at best, but I learned during my time in dealing rooms that knowing when not to make a decision is as important as, if not more important than, the ability to make one. Traders draw conclusions from news and data for a living, so always want to do that, but sometimes there is just too much up in the air to make a truly informed decision. This is one of those times.

So, while the current momentum suggests that we will hit the $61.50ish level, and that level's previous strength as a support suggests that it or something close by will constitute a stopping point, at least for a while, what happens after that is not predictable based on what we know now. For now, then, I will trade that expected move, but square up should we hit the support and bounce a little as expected and won't be making any major changes in my long-term portfolio.