Crude oil outlook and analysis - the war premium and backwardation

We have volatile price action as crude oil remains firm on geo political problems surrounding the Russian invasion of Ukraine. View of the fundamentals, sentiment and technicals below.

In terms of crude oil we have seen heavy speculative buying of crude already and front month crude is near decade highs in relation to 6 months forward which can be seen on the chart below.

Oil moving higher is a huge consensus among most investment banks and research houses with many talking about crude going to $150.00 or more. Historically, in terms of wars we have tended to see crude oil rising into the event and then corrections unfolding as we saw for example in terms of the invasion of Iraq.

According to JP Morgan: “Markets tend to overprice known unknowns and this leads to the typical pattern of "buy the fact". While the scale of the invasion was worse than feared, the lack of a swift win for Russia likely lowers the likelihood of the conflict spreading. There is some hope: so far energy exports have been left out of sanctions, and likely remain so. Together with potential Iran supply and SPR releases, crude oil upside is modest…”

With the market at a bullish extreme and crude prices already elevated, if we were to break lower, then we could see a significant correction.

Technical Analysis

On the chart below, we saw a push up last week to hit the psychological $100.00 level and prices quickly fell back; while we are up at present we are off the high of the day. If prices were to fall to 92.00, the 20 Day Moving Average would move up to this level. A break and close below 92.00 would be a bearish warning as the moving average has supported crude since the big bull move started back in December. How far could we fall if we do break lower? With speculators heavily long we could see support at $80.00 targeted as the large number of speculators who are long exit on stop.

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