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Martin Tillier

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How Significant Is WTI’s Breakout?

Permian

Oil, after looking rangebound for a while, albeit at the highest levels since 2014, looks like it has broken out. When WTI futures challenged February’s high of $66.66 a few weeks ago, we reached $66.55 before retreating rapidly, a pattern that reinforced the resistance level and suggested that we would head lower again. A couple of days ago, however, we broke through and have been trading above that point for three days now. That confirms that WTI has broken out of its range, but the lack of follow through since suggests that this may not be all that significant. An analysis of the reasons for the breakout and the price action since, however, suggest that it will be.

(Click to enlarge)

The first question that heeds to be answered is how significant any technical signal is in the longer term. The answer is not very. Even big-picture, clearly visible technical analysis such as this can only take you so far. The break of a level often triggers stop loss orders clustered around it, so can cause a quick jump that traders can exploit intraday, but over time more powerful fundamental forces hold sway. It is those fundamentals that forced oil higher this week.

The demand factors that have been in play for nearly a year now are well known. Improving global and U.S. growth suggest higher oil demand and the market has reacted accordingly. What changed this week, however, was the supply side of the equation. Conventional wisdom has held that that was a…

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