Nº 4: Crude Oil Price Outlook Heading into 2018

The latter half of 2017 has seen a steady rise in the price of oil with NYMEX WTI futures appreciating 38% since June. Will this trend continue in 2018?

A number of factors have allowed crude oil price to gain traction during last few months. Most important was the pledge between 21 OPEC and Non-OPEC countries that was made back in December 2016 to collectively reduce the daily global output by 1.8 million barrels. OPEC members Libya and Nigeria were exempt from participation, while Iran was allowed to slightly boost production. All but two nations - Gabon and South Sudan - that were part of the supply-cutting pact had reduced their output. Saudi Arabia, Russia, Iraq, Kuwait, U.A.E, Mexico, Venezuela and Algeria were the biggest contributors, in that order, to the barrels per day cut. Last week, the 21 nations alliance has agreed to extend this production cutback through 2018.

In addition to the planned drop in supply, short term factors including domestic trouble in Venezuela, political realignments in middle-east and hurricane Harvey in Gulf of Mexico have all contributed in pushing the oil prices higher in recent months.

The energy demand also remained fairly strong through out 2017 and it is expected to stay healthy in 2018. It is worth noting in the chart below that the average daily global crude oil demand has maintained a gradual rise since 2009 and it is projected to exceed 99 million barrels per day in 2018.

The trading and investment pundits are also getting past the doom and gloom that surrounded the oil industry back in 2015 and 2016. Pierre Andurand, who in September 2015 correctly forecast crude's slump to $26, is now predicting $80 oil. Goldman Sachs also recently raised its crude oil forecast for 2018.

All these fundamentals provides a firm base for oil price to continue its rise in 2018. I am cautious, though.

This caution is based purely on my technical analysis of the Weekly candlestick chart of NYMEX WTI Crude Oil, as this is the instrument I use for trading crude oil futures.

Looking at the chart below, I find price action oscillating in a specific channel since July 2016. Technically this is referred to as Ascending Broadening Wedge (dot-dash lines), where the price hits higher highs on the top resistance line and higher lows on the bottom support line. Once complete, they are typically followed by a bearish or downward breakout. It's not a rule but a statistical likelihood.

The current upward leg within Ascending Broadening Wedge still has some room left at the top and we may see price hitting $62 during next few weeks. It is trading around $57 at the moment. It would be interesting to see what follows if and when price reaches the top resistance line. I expect consolidation and a move down from there.

This thesis is strengthened by the fact that price action would not only be testing the current wedge channel resistance line, but also a major resistance encountered at $62 back in 2015 (left side of the chart). A strong downtrend followed when price could not break the resistance level back then.

Furthermore, 100-day Simple Moving Average (100 SMA) is still under 200-day Simple Moving Average (200 SMA), which is normally an indication of broad downward pressure. The Stochastic-5,3,3 (Sto) oscillator at the bottom of the chart is also in overbought territory for a few weeks now and development of a bearish divergence would be quite interesting during next few weeks - meaning price moving higher on a falling Sto.

In conclusion, my prognosis for the crude oil price heading into 2018 is that it is likely to fall, at least during the first half of the year. This drop could be as much as 33% percent, from $62 down to $42. If it come to pass, it would be good news for energy consumers. At the same time, it may put strain on economies directly affected by petroleum price. Either way, I expect 2018 to be a volatile year for crude oil.