Over the past ten months West Texas Intermediate (WTI) crude oil has traced out a large triangle pattern which could signal that a major breakout is coming.
As the chart below shows, WTI began to trace out a near perfect symmetrical triangle pattern back in 2012. Since the beginning of the year the price has twice attempted to punch through the upper resistance line (circled), and although it failed to do so the pressure is building.
The symmetrical triangle pattern
The symmetrical triangle pattern is sometimes referred to as a “coiled spring” and is formed when neither the bulls nor the bears are able to gain control. The result is a market that drifts sideways forming a series of lower highs and higher lows which form a contracting wedge pattern.
A 2 year daily chart of West Texas Intermediate (WTI) crude oil (Click on the chart for a larger version)
Chart courtesy of stockcharts.com
Note: Although the pattern in WTI is not perfectly symmetrical, that does not invalidate the analysis interpreted from the price action.
How high will oil go?
The price target for a potential upside breakout is calculated by measuring the distance between the widest two points of the pattern (green arrows), and adding it to the breakout price.
A breakout through the upper resistance line at around $94.40 would give a price target of $121.90 a barrel, however the ultimate direction of the breakout will not be known for certain until it occurs.
Potential catalysts for a higher oil price
From a macroeconomic perspective there are plenty of potential catalysts for a higher oil price. Perhaps the most obvious is a supply disruption thanks to an escalation of conflict in the Middle East. However, it may not take a conflict to cause a tighter supply/demand situation. In fact, the latest figures show that production from Saudi Arabia fell in December to its lowest level since early 2011, and it is well known that the Kingdom wants to keep oil prices high.
A sustained period of global economic growth could also push oil prices higher. However, regardless of the trigger, an oil price in excess of $120 is likely to be bad news for the global economy, since it will begin to impact the spending power of businesses and consumers alike.