Crude Oil Price Forecast: $70 Cap Holding

Oil again attempted to break through and remain above $70 per barrel this week but failed to maintain that price when the International Energy Agency (IEA) said on Thursday that global oil supplies are at a record high even though oil exports from Iran and Venezuela are falling.

For weeks, the oil market has been caught between two narratives in what some analysts are calling a tale of two markets. The first and slightly preferred story is that oil prices could rocket to over $100 per barrel after U.S. sanctions against Iran's oil exports come into effect in November. The other is that an ongoing trade dispute between the U.S. and China could escalate and drag down the global economy.

The market prefers the first story over the second one as the evidence grows that Iran's oil sector is starting to buckle. Exports of crude are down as countries like South Korea stop imports of Iranian crude entirely ahead of the November deadline. Additionally, the Trump administration has broadened the list of sanctions to target Iran's condensate and other refined oil product exports as well.

Pressure on Iran, along with a lack of spare global oil production capacity, prompted HSBC Holdings plc (HSBC) – a global investment bank – to increase its Brent oil forecast last week to $100 per barrel, and the bank expects prices to remain at that level through 2020. Brent closed Friday at $78.11 per barrel and is up 16.8% in 2018.

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This week, oil traders and analysts are likely to concentrate on developments in the U.S./China trade relationship. According to various press reports, the U.S. is expected to announce new tariffs of around 10% on roughly $200 billion worth of Chinese imports as early as this week. If the U.S. goes ahead with this latest threat, then the total amount of goods under U.S. tariffs could exceed the total amount of products that the United States imported from China last year, according to Reuters News.

Oil made another attempt to break through the $70-per-barrel price level on Wednesday last week but was unable to remain there. A report from the IEA on Thursday saying that global oil supplies hit a record high in August despite falling output from Iran and Venezuela pushed prices firmly downward on the day.

Oil closed Friday just below $69 per barrel, which put it back into its two-month trading range. When oil trades sideways like this for an extended period, traders tend to rely on stochastic indicators to find trading opportunities. These indicators perform best when prices are oscillating between two price points – as oil has been doing between $65 and $70 per barrel.

Looking at the daily price chart suggests that the market oversold oil (stochastic below 20) when it pushed down to $65 in mid-August and overbought it (stochastic above 80) when it drove up above $70 at the beginning of the month. The second attempt to break through $70 did not pull the stochastic indicators up as much as previously, indicating that the market is more comfortable with oil approaching this price level because the pace is more gradual than the first attempt. It could also mean that oil may not sell off so quickly the next time it trades at $70 per barrel.

Oil technical indicators remain mildly bullish despite some bearish fundamental news. Currently, oil has two emerging technical patterns on the daily price chart that traders call a Harami Cross and Harami Bullish because of Friday's price action. The Harami Bullish candlestick pattern has a small upward closing body that is fully covered by a previous down closing candle. The Harami Cross is almost the same thing, except the body is so tiny that the trading pattern makes a cross. The Harami Cross indicator is more definite than a basic Harami Bullish indicator and signifies a possible price reversal for the bulls.

Other trading indicators are also slightly bullish for oil. On the daily price chart, there are currently five buy and five neutral trade signals with only one sell. Short and long-term averages are also signaling a buy, with medium-term averages showing a sell, indicating a very indecisive market caught in this back-and-forth, range-bound trading action.

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment or trading advice. Oil price chart courtesy of StockCharts.com.