Markets Brace For The Long Term Consequences Of Russia's Invasion

U.S. West Texas Intermediate crude oil futures are edging higher on Friday after failing to confirm Thursday’s potentially bearish daily closing price reversal top. The weekly uptrend is strengthening while the daily uptrend is showing signs of losing steam.

The volatility is being fueled by fears over a disruption to Russian oil exports in the face of Western sanctions, which would support higher prices, and the prospect of more Iranian supplies in the event of a nuclear deal with Tehran, which could provide short-term relief to higher prices.

The Russian attack on Ukraine will remain the focus for months to come which means that concerns over supply will remain at the forefront. This also means prices are likely to remain at elevated levels, which will put pressure on the government to revive the Iranian nuclear deal.

Short-Term Recap

U.S. West Texas Intermediate crude oil futures traded at an 11-year high on Thursday, extending the surge since Russia invaded Ukraine seven days ago. The catalysts behind the rally are expectations that the market will remain undersupplied for months to come following the imposition of harsh sanctions on Moscow. Additionally, a flood of divestment from Russian oil assets by major companies has sent users scrambling to find fuel alternatives.

While the energy sector was not specifically targeted, the sanctions have hampered exporting capabilities from Russia, whose oil exports account for about 8% of global supply, or 4 million to 5 million barrels per day, more than any nation other than Saudi Arabia, Reuters said.

Adding fuel to the fire, the White House on Wednesday said it was “very open” to the possibility of targeting Russian oil and gas with sanctions. That could drive prices even higher, but some traders feel that the market has already priced in this possibility.

Weekly Technical Analysis

Weekly April WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. The trade through $100.54 reaffirmed the uptrend.  A move through the weekly high at $116.57 will indicate the buying is getting stronger.

The minor trend is also up. A trade through $81.06 will change the minor trend to down. This will also shift the momentum.

Retracement Level Analysis

The market is currently testing a longer-term retracement zone at $111.45 to $136.92.

The first minor range is $81.06 to $116.57. Its 50% level at $98.82 is the nearest support. This level will move up as the market moves higher.

The short-term range is $61.84 to $116.57. Its retracement zone at $89.21 to $82.75 is the best support area.

Weekly Technical Forecast

The direction of the April WTI crude oil market the week-ending March 11 will be determined by trader reaction to $111.45.

Bullish Scenario

A sustained move over $111.45 will indicate the presence of buyers. If this move creates enough upside momentum then look for a breakout over the weekly high at $116.57. This is a potential trigger point for an acceleration to the next upside target at $136.92.

Bearish Scenario

A sustained move under $111.45 will signal the presence of sellers. This could trigger a near-term pullback into the first pivot at $98.82.  

Short-Term Outlook

We expect to see the volatility continue next week with traders waiting to see if an escalation of the war brings further sanctions on the Russian oil industry. This would likely drive WTI prices well north of $111.45 and closer to the technical resistance at $136.92.

In the meantime, the Biden administration is hoping the war ends quickly. Besides the sanctions, it countered higher oil and gasoline prices with further releases from the Strategic Petroleum Reserve. However, the 60 million barrels it pledged to make available just simply is not enough to put a dent in prices at the pump.

This week, OPEC+ agreed to continue to raise daily production by 400,000 barrels. But the nuclear deal between the U.S. and Iran will continue to be the wildcard. Although it may take months for Iranian oil to have a major impact on supply, some traders feel just the news will be enough to cap gains, at least temporarily.

April WTI crude oil is trading inside a long-term retracement zone. Normally, we’d be looking for counter-trend selling pressure, but with upside momentum so strong at this time, I don’t think sellers will be shorting, but they could be taking profits by lightening up on the long-side.

Furthermore, currently the market is only $3.00 above the 50% level at $111.45. This means the top of the zone is over $20 away, giving bullish traders plenty of incentive to continue the rally.

There is another scenario that could weaken prices. That is high prices. There’s an old adage at the Chicago Mercantile Exchange in Chicago that goes, “The only thing that cures high prices is high prices.” It means when prices get too high, users stop buying. This spooks weak longs into taking profits. This in turn fuels a sell-off that is not designed to change the trend to down, but weaken prices enough to attract new buyers.

Trader reaction to $111.45 will set the near-term tone. Holding above this price will mean that buyers are still present, but a close under this level will create a potentially bearish condition. This won’t change the trend, but it will indicate the selling is greater than the buying at current price levels. Nonetheless, a short-term break will only be treated as a buying opportunity for bullish speculative traders.