Crude Oil Rebounds Amid Apparent Short-Covering Rally, but Will Bulls Return?

View related analysis: WTI crude oil is down, but not out

On February 5^th I wrote that I was seeking evidence of a swing low while prices held above $70. It worked a few times, with bulls stepping in to save face just above $70.1, although gains were limited overall. Perhaps more importantly, that key level has since broken to the downside this week and even saw prices dip below $69. But with a strong rebound on Thursday and daily close above $70 (just), bulls are trying their hand at the table once more.

The bounce can be tied back to President Trump’s decision to cancel Chevron’s Venezuela license, sparking a 2% rally on crude oil on supply concerns. Venezuela’s output via Chevron accounted for 13% of US imports by US Gulf Coast refineries in 2024, so this is no small decision. Although there are murmurs that the move could trigger negotiations of a new agreement between Chevron and state company PDVSA. And that could explain why Chevron’s stock price rose 1% by Thursday’s close.

WTI crude oil technical analysis

While the $70 handle momentarily gave way, it is interest to see that Wednesday’s low arrived almost perfectly at a 61.8% Fibonacci level of the September low to January high, and the high-volume node (HVN) at 68.34. The fact that Thursday was crude oil’s best day since mid-January adds further weight to the argument demand resides above $68.

A bullish divergence has been forming on the daily RSI (2), although the RSI (14) is trending lower with prices. To me this suggests that we may be on for a corrective bounce, but the risk for further lows remains in place further out. Market positioning (below) also suggests that this could simply be a short-covering bounce, as opposed to the early stages of a rally.

• Given the 200-day SMA just above Thursday’s high, my bias is to seek dips within Thursday’s range.
• The near-term bias remains bullish while prices hold above $68.30
• Upside targets remains conservative, around the $72 handle and swing highs ~$73
• Further out, I’ll then be on the lookout for evidence of a swing high and for prices to break to a new cycle low, unless we see a pickup of bullish bets on the futures market

WTI crude oil futures (CL) positioning – COT report

It is a bit of a mixed picture form market positioning. While prices have been falling over the past five weeks, so has overall exposure from large speculators and managed funds. This shows a weak move from bears overall. The fact that bearish momentum has slowed and indecision candles have also formed back this up.

Yet at the same time, shorts have increase over the last few weeks while longs were closed. I therefore suspect the rally we saw on Thursday was mostly one of short covering, but before we get ahead of ourselves and declare it as a bullish rally we need to see bullish volumes rise. Until then, I will assume my bias for a bounce as to have limited upside, but can always upwardly revise my bullish targets if the game changes.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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