Predicting Oil’s Next $10 Move

Looking back on the first half of 2020 in energy, it has been marked by one of the most volatile periods in the history of crude. The main WTI futures contract, CL, hit a peak of $65.65 early in January before beginning a collapse that would see the May contract do the unthinkable on its expiration date and turn negative. At one point, traders were paying $40 for you to take a barrel of oil off their hands.

Then began a bounce that, in some ways was just as spectacular. From the switch to the June contract onwards, CL has jumped close to 500% in a couple of months.

After filling the massive gap caused by the Saudi/Russia price war in March though, then peaking twice before falling back, the big bounce is now over as a continuous, momentum-driven move, with this week looking to end as a small net negative for crude futures..

So, what's next? What will be the direction of CL's next $10 move?

After that amount of volatility in six months, it is tempting to say that we will see an extended pause now that a level has been found, but that is unlikely. Globally, things are calming down as the coronavirus pandemic recedes, but here in the U.S. there has been a massive setback in the re-opening plans as new cases have hit an all-time high. Oh, and lest you say that is simply down to more testing, the positivity rate of tests has also climbed. That has come mainly in states that re-opened early, so it is clear that while shutting down is unpopular and damaging in the short term, it does save lives.

The distribution may be uneven, but the second wave of the pandemic is here.

The reaction to that second wave, and to the disparity of outcomes to this point between the states in the U.S., is going to create a problem for crude. This week, the governors of New York, New Jersey and Connecticut announced a "recommended" 14-day quarantine for those coming to those states from areas seeing an increase in Covid-19 cases in an attempt to preserve their states' hard-won declines in infection rates.

How long will it be before other governors who took the hard decision and resisted calls for a quick relaxation of the rules follow suit? They took a huge political risk and won't want to see the impact of their correct decision undermined by states that took the easier path. And, therefore, how long will it be before "recommended" becomes mandatory, despite the obvious difficulties of identification and enforcement that would present?

There is a very real risk here that interstate travel within the U.S. plummets over the next few weeks, even if the second wave of coronavirus falters. As it is, that second wave has already prompted the governors of Texas, California and Florida, three of the most populous states in the union, to pause their reopening plans. Driving mileage and therefore gasoline consumption, that have been bouncing back quickly in America, could easily plummet again.

So, crude's next $10 move looks far more likely to be down than up.

That impression is reinforced if we look at where, rather than when, crude's rally ended. It was a result of completely filling the big March gap, creating a massive resistance point. So, the technical picture also makes down more likely than up for the next move.

Ultimately, of course, the direction of crude's next $10 move will be decided by news that affects oil's fundamental supply and demand conditions. On balance though, given the likelihood of a drop, or at least a stop to gains, in gasoline demand for at least the next week or two, down is the path of least resistance.