Oil prices are caught between two competing forces.
On the supply side, the U.S. has become an oil juggernaut. It’s the world’s largest producer and even became a net exporter back in 2021.
That means we’re sending out more oil than we import.
And with President-elect Donald Trump’s “drill, baby, drill” mantra, the U.S. production could rise further.
That means U.S. production is helping keep a lid on oil prices.
But at the same time, geopolitical tensions threaten a surge in oil prices at any moment.
We’re seeing conflicts with top-10 producer Iran. And there are ongoing rebel attacks on tankers carrying oil in the Red Sea.
Now escalating tensions with Russia and Ukraine are spilling over into threats of all-out nuclear war.
Trying to make sense of oil’s next move seems like an impossible task.
But instead of guessing which catalyst will prevail, oil’s price chart could provide clues on the next big move…
Tracking Oil’s Trend
Oil prices spiked in mid-2022. Geopolitical tensions played a key role in that move higher.
Following Russia’s invasion of Ukraine, nations allied with the United States sought to punish Russia by cutting off access to its energy supplies.
That helped drive oil prices toward $120 per barrel in June 2022. But since then, prices have been grinding lower.
Take a look at the chart below.
After peaking in June 2022 (the arrow), oil prices collapsed by 45% over the next nine months as oil fell toward $66 per barrel.
Since then, oil prices have tested that same level on numerous occasions (shown with the green-shaded support level).
But each rally off that level has grown weaker over the past year. Oil prices have been making lower highs ever since October 2023 (“A”).
Oil’s recent trading range is growing even tighter… suggesting that something has to give.
And one key chart pattern could tip the next big move in oil prices.
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Coiling Action
Oil prices have continued to make lower highs since October 2023. But each time oil has pulled back, it found support at the $66 area.
The recent price action is tightening further still. Let’s zoom in on oil prices in the chart below:
Since July, oil prices have created a descending triangle pattern. The dashed trendline showing lower highs highlights the pattern. That’s price resistance.
Support is once again at the $66 level (the shaded green box).
Descending triangle patterns are typically bearish. That means you would expect oil to break down through support below $66 per barrel.
If oil prices do start to break through that key support level, look to the Relative Strength Index (RSI) for confirmation. The RSI measures changes in underlying price momentum.
On each pullback in oil since September, you can see the RSI has found support at 40. The dashed line in the RSI panel shows that level.
A drop below 40 on the RSI would be a confirming indicator if oil starts breaking through support at the $66 level.
So while oil prices are making lots of noise at the moment, don’t get caught up in the headlines.
Instead, follow the chart for clues about the next potential move…
Regards,
Larry Benedict
Editor, Trading With Larry Benedict