Oil Market Prepares for Potential Breakout

This article presents the long-term trends and historical analysis of the Brent crude oil market to understand the next price movements. It is found that the major movements in the oil market are driven by economic and geopolitical factors that have influenced price changes over the past two decades.

Currently, the market continues to be shaped by the balance of supply and demand, with factors such as OPEC+ production cuts, geopolitical conflicts, and economic data from China, influencing short-term and long-term price trends. The technical pattern presents the formation of a symmetrical triangle and the breakout of this triangle will determine the next movement in the oil market.

Long-Term Crude Oil Market Trends and History

The long-term technical picture of Brent crude oil is observed in the monthly chart below. It is found that crude oil prices have been fluctuating within wide ranges for the past two decades. There have been only two notable long-term sharp rallies in the history of crude oil. The first rally started in December 2008, when crude oil prices bottomed at $36.20, initiating a strong rally through 2009, 2010, and 2011. This strong rally was supported by the global economic recovery following the 2008 financial crisis, which spurred increased demand for energy as industries ramped up production and consumer activities resumed.

Additionally, geopolitical tensions and conflicts in key oil-producing regions of Middle East and North Africa disrupted supply chains and created uncertainties in the market. The weakening of the US dollar during this period also played a significant role, as oil prices are typically denominated in dollars; a weaker dollar makes oil cheaper for buyers using stronger currencies, thereby boosting demand. Moreover, the speculative trading in oil futures further exacerbated the price volatility, as investors sought to capitalize on the market conditions.

This strong rally was capped at $128.40 in May 2012, as shown in the above chart. This forms a strong resistance after consolidating for a few months and then continues to drop towards lower levels by breaking the symmetrical triangle. Following the peaks in 2008 and 2012, and bottom in 2016 and 2020, oil prices entered a period of consolidation, forming a long-term channel that suggests significant price volatility in the oil market.

Factors Behind the 2020-2022 Oil Price Surge

Another significant bottom was observed in the oil market in 2020, which initiated a sharp rally, reaching a high of $139.13 in March 2022, as shown in the above monthly chart. This strong rally was driven by the rebound in global demand as economies recovered from the COVID-19 pandemic. The initial pandemic-induced collapse in demand and subsequent production cuts by OPEC+ in early 2020 led to a sharp reduction in supply.

As lockdowns eased and vaccination rates increased, economic activities resumed, driving up the oil demand. Additionally, supply chain disruptions and logistical challenges exacerbated the tight supply conditions. Geopolitical tensions of the Russia-Ukraine conflict in 2022, further constrained oil supplies, causing additional price spikes. The combination of recovering demand, limited supply, and geopolitical instability created an environment where oil prices surged significantly over these three years.

Future Trends in the Oil Market

These strong price fluctuations have resulted in significant price consolidation within a channel per the monthly Brent crude oil chart. The bottoms in oil prices are identified by oversold conditions in the RSI, marked by red circles in the chart. After reaching a peak in 2022 at $139.13, crude oil prices are forming a symmetrical triangle, indicating a potential decisive direction.

This symmetrical triangle is similar to the one formed during the price consolidations of 2011 to 2014, but it has formed after peaking at $139.13. Therefore, a breakdown below $72 may initiate a drop in the oil market. However, the long-term pattern suggests a broader range market and the medium-term outlook will be determined by the breakout of the symmetrical triangle.

Short-Term Price Projections

To further understand the above analysis, the weekly chart below highlights the same symmetrical triangle observed in the monthly chart. It is found that oil prices are struggling within this triangle pattern but showing signs of bullish price action, as evidenced by the bottom formations and reversals around $70.06, $71.50, $72.29, and $76.76. These price behaviours indicate short-term strength, but a breakout above $100 is still required to initiate the next rally. The RSI indicator lies above 50 on the weekly chart, highlighting the significance of positive price action.

On the other hand, the daily chart shows that June 2024 has exhibited bullish forces that have broken the $85 region. Therefore, a correction towards $85 might have the chance to extend this rally towards $91-$92 initially. The daily chart also shows the RSI approaching the midline, highlighting important short-term support.

Supply and Demand Dynamics in the Oil Market

The crude oil prices remain upward trending in June 2024. This uptrend in crude oil prices poses a significant threat to inflation levels, adding pressure on the Federal Reserve (Fed) to maintain current interest rates. The prospect of high oil prices has contributed to an increase in long-term Treasury yields, as seen with the 10-year Treasury yields jumping to test resistance at 4.5. This rise in yields reflects market expectations of prolonged inflation and reduced likelihood of Fed rate cuts.

Moreover, Saudi Arabia’s financial situation also impacts the oil market and U.S. Treasury yields. Projected Saudi deficits mean the kingdom is unlikely to have spare funds to invest in U.S. Treasuries, which could drive up U.S. Treasury yields and strengthen the U.S. Dollar. Consequently, a stronger U.S. Dollar can make oil more expensive for holders of other currencies, potentially reducing global demand and exerting downward pressure on oil prices.

Despite a rally in June 2024, crude oil prices have recently dipped due to disappointing Chinese economic data to find support. The latest Consumer Price Index (CPI) data from China showed a lower-than-expected price increase, as shown in the chart below. This raises concerns about consumer demand strength in the world’s largest oil importer. However, oil prices were impacted by the U.S. Weekly Crude Oil stock report, as the weekly barrel counts fell by another 1.9 million. This dynamic reflects the constant push-and-pull between supply and demand factors influencing oil prices.

Moreover, the short-term pressures on oil prices have eased following meteorological reports that Hurricane Beryl weakened into a tropical storm which raises concerns about supply disruptions from major oil-shipping ports near the Gulf of Mexico.

Final Thoughts

In conclusion, the crude oil market remains highly volatile. The market is influenced by a complex interplay of long-term technical patterns, supply and demand dynamics, and geopolitical factors. The historical analysis of Brent crude oil reveals significant price fluctuations driven by economic recoveries, geopolitical tensions, and speculative trading.

Currently, the mixed outlook of U.S. Treasury yields and a stronger U.S. Dollar further complicates the outlook, as these factors can dampen global oil demand. Despite the strong volatility observed on the long-term charts, the oil prices show short-term headwinds from disappointing economic data from China and easing supply concerns.

Overall, while the long-term picture suggests significant volatility within a broader range, the medium-term direction will be dictated by the resolution of a symmetrical triangle pattern and evolving macroeconomic conditions. Brent crude oil is expected to trade in the $91-$92 range, while a breakout from the symmetrical triangle could initiate the next move above $100. However, a break below $72 would break the symmetrical triangle to the downside and may initiate a drop similar to what occurred in 2014 and 2015.