Backdrop: WTI Crude Oil rallied to a new 2014-high at 107.56 after ISIS started taking over cities in northern Iraq. However, since they did not disrupt the oil supply, price faded to 99.02 before traders bought up oil prices again. The fact is that geopolitical tension still exists in other regions that might affect oil supply, especially in Ukraine and Syria. After the downing of a passenger airplane last week over Ukrainian skies tensions tightened further between Russia and the West. While investigations are still ongoing, it is becoming apparent that the rebels loyal to Russia shot down the Malaysian airplane, as they have done to other Ukrainian transport planes recently. Putin’s and Russian’s involvement is unclear. Still Europe could be increasing tough sanctions on Russia, which can disrupt supply. Traders seem to have been pricing in this prospect since last Wednesday.
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WTI Crude Oil prices started the week settling around 103, but sprung higher during the US session. As we wind down the 7/21 US session, It is now trading around 104.60. This rally should shelve some of the bearish outlook suggested by last month’s decline.
1) Price broke above a falling trendline from 107.36.
2) Price broke above the 200-, 100-, and 50-period SMAs in the 4H chart.
3) Price broke above 61.8% retracement of the 107.56-99.02 decline, which was at 104.30.
4) The RSI has broken above 70, which essentially shows lost of bearish momentum and also establishes some bullish momentum.
With the bearish outlook shelved, the bullish outlook should still be limited for now to the 107.35-50 area. The geopolitical risk is being priced in, but without actual supply disruptions, oil price might fall back down. Now amid a general environment of geopolitical risk, oil might remain elevated close to its 2014-highs, but let’s consider the range it has carved out during June and July’s price action roughly between 99 and 107.50. The 50% retracement at 103.30 represents the central pivot. As traders price in and out risk premiums, I would anticipate price action to oscillate around this “central pivot” area.
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