WTI back on the defensive, drops below $42.00 though still in bullish upwards trend channel

Front-month WTI futures have been choppy on Friday, swinging to highs of close to the $42.40 mark during the European morning, only to sharply reverse course in recent trade back below $42.00 and to current levels in the $41.80s. As things stand, front-month WTI futures trade about 0.1% lower, or with losses of less than 10 cents on the day.

WTI price action a function of broader risk appetite

Supply-side news has been light for crude oil on Friday, and this may well remain the case until OPEC+’s month-end meeting, during which markets will learn for how long, or even if, the cartel will opt to extend its current production cut agreement. The consensus amongst OPEC+ nations seems, for now, to be for at least a 3-month extension to the current pact, which is current scheduled to expire in January 2021.

WTI has thus instead followed trends in broader risk appetite, which has also lacked a firm directional bias. Competing themes continue to buffet markets between risk-on and risk-off; vaccine optimism vs short-term virus/lockdown risk pessimism, Joe Biden US Presidential election victory optimism vs short-term lame duck US President Trump session political uncertainty. Most recently, the news that US fiscal stimulus talks have restarted has given sentiment a boost, while the news that the Fed will not have the majority of their emergency pandemic lending programmes renewed past the 31^st of December (opening up a bit of a tiff between the Federal Reserve and the US Treasury) has weighed on sentiment.

Rangebound WTI looks to break below recent uptrend

WTI has been quite rangebound since Thursday, spending most of its time over the last 36 or so hours between $41.50 and $42.00. However, the US benchmark for sweet light crude has appeared to trade within an upwards trend channel, the upper bounds of which link the 17, 19 and Friday highs and the bottom bounds of which link the 13, 17, 19 and Friday lows.

With broader risk appetite indecisive for now, crude looks set to continue to conform to this trend line for the time being, meaning that the path of least resistance appears to be a move back above $42.00 ahead of a potential second test of Friday highs at $42.28. A test of this week’s highs at $42.68 would require a break above WTI’s recent upwards trend channel and is thus less likely in the short-run.

Conversely, if the crude oil bears continue to push WTI lower, as they have done in recent hours, a downside break of the current trendline would open the door for a test of Thursday’s lows at $41.26 then perhaps also the $41.00 level.

WTI one hour chart