Crude oil prices have been trading volatile over the past few days. Most of the volatility came from the OPEC member nations comments in another attempt to freeze oil production. Oil prices were bearish just two weeks ago, but thanks to a weaker dollar from the FOMC keeping interest rates unchanged and the weekly Crude oil inventory report showing a third consecutive week of drawdown in stockpiles, oil prices managed to bounce back strongly.
But the coming week will be very important as oil traders look ahead to the September 26 – 28 Algiers Oil summit forum. More importantly, it is the informal meeting by OPEC members and Russia who are planning to chalk out a production free deal to help boost prices.
The OPEC members previously failed to reach an agreement during the meeting in Doha as Saudi Arabia and Iran failed to reach an agreement. While Saudi wants Iran to freeze production, Iran, for its part maintains that it will not freeze production until it makes up for its lost market share.
This week, there was some hope as Venezuela president; Maduro told reporters that OPEC was close to an agreement. These comments came after he met with Iran president Rouhani. Those comments were bullish and supported the oil price rally, but soon, by Friday Saudi and Iran were back to playing their games of disagreement.
After the meeting in Vienna this week, Iran and Saudi officials failed to see eye to eye on production freeze. Saudi Arabia for its part made a concession noting that the Kingdom would cut production in return for Iran to freeze production.
Even if Saudi Arabia cuts production, at the current levels, Saudi oil production is at record highs, something which Iran is likely to see. Despite the concession and the idea that it puts Iran in bad light, the fact remains that the game hide and seek continues to play out.
For oil traders this only means a lot more volatility.
WTI Crude Oil Renko Chart Analysis
The Crude oil renko analysis paints an interest picture with the risks to the upside and downside fairly balanced. This means that prices could break out in either direction and it all comes down to how the markets react to the outcome from Algiers this week.
Crude Oil Bullish Scenario
On the bullish side of the analysis, Oil prices are forming a large inverse head and shoulders pattern. Roughly put, the neckline resistance is seen at 48, while the head’s low was formed at 28. This gives Crude oil an upside target of over $20, meaning oil prices could rally to $68 at the very least, if price breaks out above $48.
Supporting this view is the symmetrical triangle from which oil prices are currently consolidating. An upside breakout is essential in order to see further gains.
Therefore, bullish oil traders need to keep an eye on $48.00
Crude Oil Bearish Scenario
On the bearish side, the technical patterns are equally convincing. For example, the bearish divergence to the MACD histogram shows that prices could correct down to $33.71. This would mean that Oil prices must breakout from the rising trend line, around the $40 handle. A bearish close here could see oil prices fall down to $33.71 or $34.00 rounded off.
Furthermore, the price action also shows an inclined head and shoulders pattern with the right shoulder formed at the $48 handle previously. Therefore, if prices don’t rise above $48 and instead decline, we could see the gains decline even below the $34.00 handle.
Crude Oil – What is best case scenario?
I think Crude oil could be bearish. In the next chart you can see prices moving within a broadening wedge pattern. With the recent rally from $40 failing to clear above $48, prices have been declining. This could mean that further declines are in store for a correction down to $34.00 handle.
The best way to trade Crude oil next week is to look for short positions near the $44.50 handle with stops at $48.50. That is about $4 in risk. To the downside, $34 is the minimum expected target, which puts the reward to around $9.50.
Alternately, in the event that oil prices breakout above $48, we could expect the gains to move towards $68. Buying the breakout above $48 puts the reward to $20, and the stops can be set to the current $44.50 handle, meaning a risk of $4.50.
No matter which way you look at it, Crude oil trade set up offers a fairly good risk/reward.
It’s now up to what happens next week. More importantly, how the markets will behave to the events next week.