OPEC’s new deal to cut crude oil production for the first time since 2008 seems to have caught the market off-guard. WTI crude prices spiked 9% the day the deal was announced. Now oil traders are assessing whether or not the OPEC deal is the catalyst for a major technical breakout. Here’s a look at the charts.
WTI crude prices initially spiked just shy of $50/barrel. That’s certainly good news for oil investors, but it’s not the big technical breakout that could signal significant upside ahead.
What traders should be noting is that WTI has spent the majority of 2016 forming a bullish technical pattern: the ascending triangle. This pattern is formed when a stock has both a horizontal resistance line and an upward-sloping support. The ascending triangle is a very bullish formation and can signal a reversal following a long-term downtrend like the one that WTI crude oil has endured in recent years.
The key breakout level indicated in the chart above is $52/barrel. That level served as resistance for WTI in both June and October. If it holds once again, WTI should find support in the $43-$44 range. However, if WTI breaks above $52, it could be smooth sailing to around $62. That level served as resistance throughout May and June of 2015.
The United States Oil Fund LP (ETF) (NYSE: USO) already appears to be on the verge of a breakout from the pennant pattern it has been forming for most of the year. A pennant is a technical analysis pattern that forms when a stock has a descending resistance line and an ascending support line. In the chart, the convergence of the two lines appears to “pinch” the share price in the shape of a pennant.
Pennant patterns often form during consolidation phases of longer-term trends. USO may currently be on the verge of breaking out of its pennant pattern.
A significant move above $11.50 would indicate a breakout from the pennant pattern and would likely mean that a test of June’s $12.45 high. USO can break above that level, the next likely resistance would come at the $16 level that held multiple times throughout September and October of 2015.
A number of oil stocks have made huge moves since the OPEC news came out. While headline news like this is wonderful for short-term traders, longer-term investors should keep the news in perspective.
A 9% move in crude oil prices is great, but $50/barrel oil is still a long way from the $65-$75 oil prices needed for higher-cost producers to return to profitability and growth. Shareholders of deepwater drillers and other high production cost oil stocks should consider using the post-OPEC spike to transition to safer investments within the oil space.
Disclosure: the author holds no position in the stocks mentioned.
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