The Purely Technical Reason Oil Will Hit $122

Whatever The Reason, Oil Is Moving Higher 

If you are watching the news and wondering where the price of Oil NYSEARCA: USO is heading we think it is going higher. Much higher. We can sit here and debate the causes of the rise in prices but the fact remains that oil prices are on the rise and the technical picture is bullish. The key takeaway, on the fundamental side of the picture, is that global capacity has been constrained in the face of rising demand and that is always bullish for prices. We can’t say how long the price will stay there, but we’re confident the price will hit $122 if it manages to break above the $95 level. 

A Perfect Storm For Energy Prices 

To understand where oil prices are going, it's important to know where they’ve been, and they have been much lower and much higher than they are now. Starting with the weekly chart, the price of oil hit a low in the wake of the pandemic that quickly turned into a rally. The rally was based on the reality the pandemic was much less severe than initially estimated and then compounded by the economic boost of stimulus spending, capacity tightening policy from the Biden administration, OPEC policy, and now a string of geopolitical events that are culminating with the threat of WWIII in Europe. This has the oil price in a steady uptrend that has been confirmed by not 1 but 3 bounces from the 150-day moving average. 

The uptrend broke out to a new high in late 2021, a 3-year high, that has since been surpassed. Price action was vigorous during the test, initial break of support, and then the retest and bounce. This action has not only confirmed the uptrend as support but now at the top of a multi-year trading range as well. Even if price action falls from its current level we would expect to see this level act as support and possibly strong support in the event. Regardless, the indicators are consistent with increased volatility during the break to new highs and, more importantly, the MACD peaks are converging with the new highs and are a sign of strength. 

Oil, The Here And Now 

Now, with oil in an uptrend and global capacity once again in peril the oil price is hovering at a multi-year high. In our view, the recent price action has of being a Double Top but also a Bullish Flag pattern, we are leaning toward the Bullish Flag pattern because of the underlying strength we see in the weekly charts. The indicators may be rolling into a bearish signal or a bullish one, but the odds favor a bullish signal as do the fundamentals. 

The question is what happens now and there are two possibilities. The first is that oil is at the top and will not advance from this level. The second is that oil is not at the top and will break above the $95 level sooner, we think, and not later. In that event, the price action would confirm the uptrend and bring some technical targets into play. The most notable would be the magnitude of the rally from $64 to $95, a rally worth $31 which when projected from $95 gets you $122. 

Why Is $122 So Important For Oil? 

The $122 level is important for oil for more reasons than our simple projection. The market has a long memory and $122 is the highest price anyone has paid for WTI in about 15 years. We are certain the market will hit strong resistance at this level if not before so this is a trade we’re talking about and not an investment. The takeaway, for us anyway, is that with oil above $90 the oil companies are going to be pulling in windfall profits even without a move above $95 and that is a good thing for their share prices, dividends, and buy-back programs.