Is it safe to buy crude oil after dropping $30 from 2022 highs?

Crude oil price tumbled below $90/barrel last week as G7 wealthy nations plan a price cap to lower Russia’s revenue. The invasion of Ukraine by Russia is strongly condemned by the Western nations, and economic sanctions on the aggressor are one way to support Ukraine in its fight against the invader.

The plan to cap the oil price at a certain level calls for G7 countries to deny a range of services to oil cargoes priced above the cap. While the cap level is unknown yet, the plan’s existence was enough to influence crude oil prices negatively.

A double top pattern hints at more downside in the short and medium term

The WTI crude oil price traded above $120 this year, a staggering level considering that two years ago, oil futures settled into negative territory. But as the COVID-19 pandemic eased, oil demand increased, and oil prices started a bullish trend.

By failing to hold above $120/barrel, the crude oil price formed a reversal pattern – a double top. When trading such a pattern, traders wait for the price to break the neckline and, eventually, retest it.

The measured move, seen below in orange, suggests that further weakness towards $70/barrel is possible.

Oil prices could spike in winter

Over the weekend, the US Treasury Secretary, Janet Yellen, warned that the oil prices could spike in winter because of European Union is planning to cut back on buying Russian oil. As such, further weakness in the oil price would likely be met with buying orders as we get closer to the winter months.

All in all, the energy market was wild this year. The war in Ukraine triggered wild price gyrations in the oil market and others, such as the natural gas market.

Therefore, trading in such markets requires special attention. Money management is paramount as things may turn in the blink of an eye.

In summary, crude oil prices will likely remain under pressure in the short and medium term. However, as the winter months come closer, expect buyers to emerge on every dip.