Oil Price Forecast: WTI and Brent Set Up for the Next Breakout

Oil prices rallied on Thursday after two days of correction. The price of Brent crude oil (BCO) rallied back above $106, while WTI oil (CL) was heading toward $100. This rebound indicates that the traders are fully convinced that the Iran war will soon end. The improvement in sentiment about the US-Iran deal had driven the correction in the oil prices earlier. But Iran threatened to shoot down another attack and increased its control over the Strait of Hormuz. This increased supply risk again in the market and pushed the prices higher on Thursday.

The Strait of Hormuz primarily influenced the oil prices. A significant portion of the world’s oil and LNG supplies passes through the waterway, and any disruption would constitute major supply shock. Iran’s new controls of the Strait raise the possibility of further delays in shipping and further energy supply restrictions. It helps to maintain a high risk premium in crude prices. But if talks don’t succeed, traders may raise oil prices if they factor in more disruption in the Middle East.

Oil prices also rallied on the U.S. inventory data. The sharp drawdown in commercial crude stocks and the record withdrawal from the Strategic Petroleum Reserve indicate that supply losses are already compelling countries to dip into their reserves. That will make it more difficult for oil prices to remain low. Fewer inventories make for less safety stock in the market and make prices more vulnerable to new geopolitical shocks. With Hormuz continuing to be closed and inventories on the decline, oil prices could continue trading at a higher level despite short term dips.

WTI Oil Technical Analysis – Triangle Pattern Defines the Next Breakout

The short-term price action for WTI crude oil shows strong consolidation between $98 and $108. This consolidation range is defined by the triangle pattern that is stretched from the broader consolidation between $80 and $120.

The recent correction in WTI crude oil from $104.50 was due to the strong resistance of this triangle pattern. The triangle’s important support remains at the $97 level. A break below $97 will offer further downside toward the $80 area. However, a break above $108 will indicate further upside toward $120.

Overall, WTI crude oil remains in consolidation between $80 and $120 and looks for the next move.

The broader picture for WTI crude oil remains strongly bullish as seen in the weekly chart below. The chart shows that the Adam and Eve pattern formed the bottom formation above $55. The US-Iran war triggered the breakout from $78.

This formation of the Adam and Eve pattern indicates that the bottom in oil prices has been established. As long as the price remains above the $78 region, it will likely break higher once the consolidation is over.

However, a break above $120 will trigger the next strong upside move. As long as the price remains above the $100 region, the likelihood of an upside break above $120 is higher.

Brent Oil Technical Analysis – $100 Support Keeps Bulls in Control

The Brent crude oil market also shows the formation of an Adam and Eve structure above the $55 support region. After the formation of this support, prices broke above the descending trendline at $72 and the 200-day SMA at $80. This breakout triggered a strong surge above the $100 area.

As long as prices consolidate above the $100 region, the possibility for Brent crude oil to trade toward $125 to $135 is higher.

The recent correction in the Brent oil market from the $120 region is due to the extremely overbought condition as seen by the RSI. The RSI is now cooling off from the extremely overbought levels. If the RSI hits the mid-level, it will likely trigger a strong buying opportunity in the Brent crude oil market.

Bottom Line

The lack of supplies, falling inventories and uncertainty regarding the Strait of Hormuz continue to support oil prices. The recent recovery from the support suggests that traders are still buying in on a higher geopolitical risk premium despite some short term corrections. The crude oil market continues to trade in a wide consolidation range between $80 and $120.

The technical structure has been constructive as long as prices are above the main support structures. A break above $120 in the crude oil market will fuel the next surge. But any resolution to the U.S.-Iran conflict will diminish the risk premium and could lead to a temporary pullback.

Read more: Crude Pullback May Be the Calm Before the Next Surge