Crude oil bulls eyeing key support following largest three-day plunge in months

• WTI crude oil suffered its largest three-day drop since October to end last week
• The bearish price action came before news of retaliatory strikes from western forces on Iranian-backed militia groups in Iraq, Syria and Yemen over the weekend
• Crude oil is now staring at its 200-week moving average, a level it traded through but never closed below on 12 separate occasions in 2023

Crude oil finished last week nursing its largest three-day decline since October, sliding 7.1% despite escalating geopolitical tensions and signs disruptions to shipping activity around the Red Sea may be tightening global seaborne markets. But with US and UK forces bombing Iranian-backed militia targets in Yemen, Iraq and Syria over the weekend, with more attacks planned based on recent reports, grounds for a bounce may be increasing, especially with crude nearing key support that’s held strong for much of the past year.

Crude oil logs largest three-day drop in moths

The chart below looks at the three-day percentage rate of change for front-month WTI crude futures over the past year. After a sustained period of strength in January, seeing prices threaten to break $80 per barrel for the first times since early November, the price hit the skids last week, initially on hopes for a new ceasefire in Gaza between Israeli and Hamas before renewed doubts about the scale and timing of rate cuts from the Federal Reserve resurfaced on Friday following a blowout US nonfarm payrolls report.

Source: Refinitiv

Had the price finished on its weekly lows, it would have been the largest three-day decline recorded since June or even April of last year. However, just as futures were closing, news broke that US military forces had begun attacks on Tehran-backed groups in Iraq and Syria in retaliation for an attack in Jordan days earlier which killed three US personnel. On Saturday, separate strikes involving British and US forces on Houthi targets in Yemen were executed, with the US signaling further retaliatory measures were likely.

While some form of response was always likely from Western forces, it clearly poses the risk of stirring up even greater tensions across the Arabian Peninsula, leading to the potential for further disruption to crude oil supply. And with the crude price rapidly approaching key technical support, it’s not difficult to see the potential for a near-term bounce from these levels despite the ugly price action last week.

WTI chart has something for bulls and bears right now

The weekly WTI crude chart has something for bulls and bears right now. The bearish engulfing candle warns of potential downside beyond that already seen. But at the same time, the price has never closed below the 200-week moving average last year, attracting buyers on 12 separate occasions when it dipped below.

But longs preferred given good long-term track record

Even with the bearish price action last week, I’m more inclined to establish long positions given the longer track record of bullish price action from this level. But there’s no need to rush in imminently given the pullback has vastly improved the risk-reward of the trade. In a perfect world, it would be nice to see a probe below the 200-week MA, then a bounce back above, before entering the trade, allowing a stop to be placed below the weekly low for protection.

As for upside targets, crude has struggled above the 50-week MA recently, making that a logical level to aim for. Above, the price stalled above $79.20 last week, adding to the two failures ahead of $79.80 recorded in November.

-- Written by David Scutt

Follow David on Twitter @scutty

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