Is $100 Oil Within Reach?

A few weeks ago, when WTI crude was trading just below $80, I wrote here that I was about to break with my usual, contrarian trading style and establish a long-term long position in oil after a gain of around ten percent since the beginning of February. Normally, if something has climbed that far that fast, I start to look for a pivot point; a level at which a correction or consolidation will come. Last month, however, the more I looked at the fundamental factors influencing oil, the more convinced I became that it was heading higher still. I was right, but the question now that we are through the psychologically important $85 level is, “what next?”.

As I said, my natural inclination would be to sell something when the three-month chart looks like the one above. Commodities tend to correct, not least because of the invisible hand that comes from the relationship between price, supply, and demand. When the price of a commodity climbs consistently like that, it encourages increased supply and damps down demand, pushing prices lower.

However, the relationship is not set in stone, nor is it immune to other influences; and those other influences suggest that despite a strong start to the year, oil is still heading higher.

The effect of demand for oil on price is not absolute; it is relative. If, for example, demand is recovering from a low and normalizing as it is now, it is less price sensitive than it might otherwise be. The additional demand in that situation is not marginal and price dependent. It is rather just about a reestablishment of essential demand and will only be muted after extreme price increases.

There is also another bullish factor on the demand side of the equation. Markets have been working on the assumption that US interest rates that have risen from zero to 5.25% in a relatively short time would inevitably result in a significant slowdown or even a recession in America and when America sneezes, the rest of the world usually catches a cold. Over the last month or so, though, a different narrative has been driving equity indices ever higher.

The belief now is that the American economy can handle interest rates at these levels and continue to grow as inflation is gradually reduced. This week’s jobs report for March, and the market reaction to it, seemed to support that contention. Non-farm payrolls increased by 303,000, much more than the 200,000 expected, and the unemployment rate ticked down to 3.8%. However, the stock market, which had been skittish about any indication that there would be fewer rate cuts or that they would start later, absorbed that with just a shrug of the shoulders.

On the supply side, the supply of oil is certainly about more than just price. The existence of OPEC+, the geopolitical issues around oil, and the politicization of fossil fuel production in the developed world all impact output levels at least as much as market pricing. And all of those factors seem to be working to artificially restrict the supply of crude right now. OPEC+ are maintaining their cuts and seeking increased compliance, the Israel/Hamas war is straining relationships in the Middle East, and easing inflationary pressure in the US and Europe is re-energizing ecological groups in those areas.  When prices in an economy are soaring and oil prices are perceived as part of the problem, exhortations to limit drilling and supply fall on deaf ears, but, once they stabilize, those campaigns resurface.

So, we have a situation where there is still bullish pressure on crude from both the demand and supply side, despite a sustained climb in prices this year. Even though my instinct is to look for a turning point and an opportunity to short, higher still looks far more likely than any meaningful correction any time soon. The next question then is how high can we go? For that, we turn to the 1-year chart…

At first glance, some resistance around $90 looks likely. First, it is a nice round number, and second, it represents a high from October of last year, after which crude moved consistently lower. There are, however, two problems with that view. The first is that the level had not proven to be particularly significant on the way up, the second that that high was formed during a retracement during a sustained move down, making it likely that the retracement percentage was more influential than the price level.

So, if we discount $90 as a serious resistance based on those factors for WTI, crude looks set to challenge the September high of around $94. That should create some resistance, but if the US and other economies continue to grow despite high interest rates and supply remains restricted, even that may not hold, bringing the big one, $100 crude, into the conversation for the first time in two years.

Trading is about keeping an open mind and making informed decisions based on the available evidence and data, not your preconceptions and biases. In this case, while the latter may tell me to sell my existing long position in crude and maybe even reverse to a short, the former is clearly telling me to at least hold on, if not actually add to the position. Until otherwise indicated, I will trust the data and work on the assumption that $100 is within reach.