Oil whipsaws after big fall

Oil prices have fallen and recovered in wild swings this month. Will the holidays offer some stability?

All aboard the roller coaster

The markets were not kind to oil prices at the start of the month, with WTI declining almost 13% in the first nine days. Not only did it break into new lows for the year, but it was the fastest decline since the highly volatile period immediately after the start of the war in Ukraine.

There were many reasons for the decline, from weak liquidity to the uncertainty surrounding the reopening in China. There was a price cap on Russian oil and the jam of tankers in Turkish waters of the Black Sea. But despite the expected disruption in supply, the price didn't manage to rise. That is, until this week.

Up, up and… now what?

In the first two days of the week, WTI has bounced up over 7% since the Friday close. The reasons for the sudden recovery might give some explanation for the last fall, as the two surges in price were attributed to two reasons. The move higher on Monday was attributed to constrained supply, as it emerged that the Keystone pipeline that had suffered a leak a few days prior would be closed for longer than expected. Then Tuesday saw a cooler-than-expected CPI print, which gave reason to expect the Fed to pull back on tightening.

Another factor supporting natural gas, which is linked with crude prices: An arctic storm affected most of Europe and North America, bringing unseasonably cold weather. The storm is expected to keep temperatures low until the end of the week, reversing a hot start to the winter. It was a reminder of what meteorologists have been forecasting as a relatively cold winter for "22/23" due to La Nina still being in effect.

WTI ended falling wedge

The crude prices appear to have completed a falling wedge pattern down at $70/bbl (S1) with the upper trendline near $77/bbl (R1) in focus. Breaking past the barrier might expose 82.40/bbl (R2) and the high of $93.70/bbl (R3). Inversely, crashing below the crucial floor, might clear the path towards $65/bbl (S2) and $60/bbl (S3).

In the interim, $85.25/bbl and $90.00/bbl might build resistance, whereas $67.50/bbl and 62.50/bbl support.

Key takeaways

Oil prices have been volatile this month, with a significant decline and subsequent recovery. The decline was attributed to various factors, whereas the recovery to constrained supply and expectations of the Fed pulling back on tightening. A cold weather storm also supports natural gas prices, which is linked to oil and is expected to continue until the end of the week. The storm is a reminder of the forecast for a relatively cold winter due to La Nina.