WTI crude oil inflates its way into 2025, eyes break of $80

Concerns over rising inflationary pressures were building as we headed towards the end of 2024. And despite a softer core CPI print released on Wednesday, there is little to suggest these inflationary forces are dissipating. Inflation is a lagging indicator at the best of times, so it’s best we look at some key inputs to gauge where inflation could be headed in 6-12 moths from now. And it’s not looking great for Fed doves.

Commodity prices up nearly 15% y/y, looking at the CRB commodities index
Crude oil prices have rallied over 20% since the December low
ISM services ‘prices paid’ reached a near 2-year high in December
US import prices were up 1.2% as of November
5-year breakevens (inflation expectations) rose to a 6-moth high of 2.5%
NFP continues to knock out strong numbers

But perhaps the greater concern right now is the rapid rise of oil prices. A combination of factors have been behind the recent surge, the most notable of which being the intensified sanctions on the Russian oil market. This has left China and India scrambling for cheap elsewhere as the back-channel deals that previously thwarted US sanctions is no longer there, which has effectively squeezed supply and driven crude oil prices higher.

WTI crude oil futures positioning – COT report:

Oil prices have reached a 40-week high and currently on track for a fourth consecutive week higher. And the move has been powered by a surge on bullish bets among large speculators and managed funds, while shorts remain nowhere to be seen. Open interest and speculative volume (large specs and managed funds combined) us also rising, which has pushed net-long exposure to a 25-week high among large speculators and A 65-week high among asset managers.

Moreover, none of the metrics mentions are near a sentiment extreme by historical standards. And that could pave the way for further gains as we head deeper into Q1.

However, resistance looms over the near term.

WTI crude oil technical analysis

It has been 16-day since the pre-Christmas low, and the market has rallied 16%. Using a 20-day ROC (rate-of change) suggests the rally could be extended, as it has reached a level of natural resistance by recent standards. The daily RSI (14) is also overbought and the daily RSI (2) has a bearish divergence.

Resistance is also nearby with the 80% handle and double top which formed in April. If anything, I suspect an initial false break of $80 could see prices retrace. But the strength of the trend could also see it remain above Wednesday’s bullish outside-day low.

Bulls could seek dips towards $76 if prices fail to hold above $80 initially
The bias is for an eventual break above $80 and move to the 2023 highs around $85.70)
A break above $76 invalidates the near-term bias, but bulls could then seek dips above $72 on the basis that fundamentals and market positioning remain firmly bullish for WTI crude oil

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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