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Summary: WTI crude oil extended its corrective rally from its lowest level since December 2021 to $71.70 before the European trading session on Monday, forming a three-day uptrend. WTI crude oil benefits from RSI rebounding from the oversold area.

Fundamentals

WTI crude oil experienced a roller coaster ride this past week. After falling for three consecutive days to levels near the lowest since 2021, it rebounded and regained lost ground. Undoubtedly, this was another panic sell-off, with algorithmic trading amplifying market trends.

The world's largest crude oil consumer, the United States, raised interest rates to the highest level since 2007 on Wednesday, posing a threat to future U.S. economic growth, which in part caused oil prices to fall sharply last week. However, due to some positive growth in the U.S. service sector and expectations that major oil producers will begin reducing output this month to limit supply, investors are buying back into crude oil.

The recent sustained decline in crude oil has come mainly from macro-level pressure. With all the unfavorable supply and demand news having been digested, oil prices are starting to find some support. However, oil prices have not yet been able to recover the 9% decline from the first three days ago as demand concerns from major consumers overshadowed signals of a possible pause in U.S. interest rate hikes.

For future trends, following the Fed's rate hike in May, macro-level pessimism will gradually fade, and the focus will shift to reduced supply logic. This means that the trading range for oil prices in May will be more blurred, and with the U.S. reserve policy difficult to change, bottom support will weaken.

However, in terms of supply and demand, OPEC's production cuts and the decline in U.S. production will help stabilize oil prices. Therefore, oil prices are expected to maintain a range-bound oscillation in May, which is currently at the lower end of the range, while the oscillation is expected to be wider and encounter greater macro and fundamental risk volatility. It is recommended to gradually establish long positions up to the starting point of previous price sell-offs.

Technical Analysis

WTI crude oil has managed to partially reverse from last Friday to date. The overall drop of more than 9% last week was the largest one-week drop in three weeks.

The daily charts for May 3, 4, and 5 show that crude oil prices have formed an inverted "pin-bar" reversal pattern. The formation of this pattern suggests that prices may continue to rise until the previous price swings' highs.

In the 1-hour chart, WTI crude's modest rise from the May 4 low of $63.67 has evolved into an uptrend channel, suggesting that bulls are eager to return. However, this small and sustained uptrend phase has just touched the upper limit of the uptrend channel at about $73.00. The 1-hour Relative Strength Index (RSI) is in overbought territory. These observations suggest that the upward momentum of the small uptrend has reached an overstretched state, increasing the risk of a slight correction at this point. Immediate support is at $71.05.  

While $69.30 is the key short-term support to sustain this modest uptrend, the next resistance is at $74.25. Breaking through it may test the next resistance at $76.05-$76.80.

On the other hand, the failure of the bulls to stay above $69.30 could jeopardize a small uptrend, which could push prices back into the recent bottom range again. On the bright side, however, the uptrend remains intact. Buying the dips is recommended to be the main trading strategy.

Trading Recommendations

Trading Direction: Long

Entry Price: 73.00

Target Price: 83.00

Stop Loss: 67.50

Valid Until: 2022-05-22 23:55:00

Support: 71.90, 70.98, 69.84

Resistance: 73.90, 75.37, 76.95