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WTI crude eyes key resistance
Commodities 5 minutes to read
Ole Hansen
Head of Commodity Strategy
Summary: Having spent the past three months rangebound within a 12-dollar range WTI crude oil is once again challenging key resistance in the $80 area, while Brent faces a steeper climb to its $85 resistance level. The alternating market focus seen in recent months helped create a very difficult trading environment with directional bets by speculators failing on several occasions, forcing trading positions to be adjusted on a regular basis, thereby triggering moves that found little fundamental justification. However, in recent weeks the market has been supported by ongoing Red Sea disruptions and emerging signs of tightness.
Having spent the past three months rangebound within a 12-dollar range around $74/b, WTI crude oil is once again challenging key resistance in the $80 area. Brent, similarly, confined around $79, faces a steeper climb to its $85 resistance level. During this time prices of both have struggled to gain momentum with geopolitical concerns and OPEC+ production cuts offsetting demand concerns, not least in China, the world’s top importer of crude.
This month has, however, seen a strong rebound, initially supported by fuel market tightness leading to higher refinery margins, or so-called crack spreads. Not least diesel prices which found support after global stock levels fell below their seasonal averages, supported by refinery disruptions in Russia amid Ukraine drone strikes, and not least continued attacks by Houthi on shipping in the Red Sea and the Gulf of Aden. The latter have led to the re-routing of east-west tankers from the Red Sea and the Suez Canal to the much longer route around Africa, in the process tying up millions of barrels of diesel and gasoil on the water for longer.
While some of that support has faded with crack spreads easing, crude oil has nevertheless managed to maintain a bid amid continued Red Sea worries and signs the crude market has started to tighten up. The alternating market focus seen in recent months helped create a very difficult trading environment with directional bets by speculators failing on several occasions, forcing trading positions, both long and short, to be adjusted on a regular basis, thereby triggering moves that found little fundamental justification.
However, in the latest reporting week to February 13, money managers showed an increased belief in higher prices, not least in Brent, the global benchmark, after they boosted their outright long positions to the highest level since October 2021 while the net position reached an 11-month high at 276k contracts or 276 million barrels. Positioning in WTI remains relatively weak with a net long at 116k contracts, some 44k contracts above a five-year low reached just before the Red Sea crisis began in early December.
The price difference between monthly contracts has been widening, indicating a more robust outlook across parts of the physical market. The three-month spreads shown above for WTI and Brent have both widened to around a $2 per barrel backwardation, highest since October, and up from a -$0.5 per barrel contango at the start of the year. In the short term, focus remains on the Red Sea where Houthi attacks continue while a Qatar attempt to broker ceasefire deal between Israel and Hamas has so far been fruitless. In addition, ahead of the OPEC+ meeting in early March, the group’s effort to trim output seems to be successful.
Overall, we maintain the view Brent and WTI will likely remain rangebound, respectively around $80 and $75 per barrel during the first quarter but with disruption risks, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed to the upside. In the short term, the market will be focusing on WTI and whether traders will be successful in pushing the price through resistance just below $80, the result of which, could see it target $81.37 followed by $82.56.
For a closer look at the technical perspective for WTI and Brent, please check out this latest update from Kim Cramer, our technical analyst.
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