Should you buy oil given the unprecedented divergence with energy stocks?

on Dec 21, 2022
  • Oil prices and energy stocks are in a major divergence
  • Such unprecedented divergence is typically resolved with an oil rally
  • $120/barrel for WTI is major resistance in 2023

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December is a time of reflection and planning for financial market participants. Everybody is preparing for the holidays and what 2023 might look like, and the energy sector looks very interesting.

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Throughout 2022, the energy crisis shaped the world’s economies. After the war in Eastern Europe started with Russia invading Ukraine, oil prices skyrocketed to over $120/barrel.

The level is nothing short of impressive, given that oil traded at -$40/barrel only a couple of years ago. Therefore, we can say that the road from negative prices to over $120 was certainly one of the most spectacular rallies in the oil markets ever.

But crude oil prices topped this year after the WTI traded above $120/barrel. From that moment on, the WTI lost all of its 2022 gains and now trades almost flat on the year.

However, one studying the energy sector cannot ignore one unprecedented divergence between oil and energy stocks. That is, while the price of oil declined in the past 100 trading days ending mid-December, the energy sector had surged.

Historically speaking, traders should prepare for an oil rally, as this is how such a divergence is typically solved. So what are the technical levels to watch and is it fair to assume an oil rally in 2023?

WTI crude oil caught between resistance and support

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In light of the above-mentioned divergence, it would be interesting to see what level would be first broken by the WTI crude oil price – support at $60/barrel or resistance at $120/barrel?

WTI crude oil chart by TradingView

The double top pattern appears to be resolved as the market already traveled the equivalent of its measured move, but more weakness might lie ahead as the double top is a reversal pattern.

However, in the grand scheme of things, the recent price action from the past 100 trading sessions looks like a healthy correction. Therefore, considering the unprecedented divergence from energy stocks, one should not be surprised to see oil prices rally in 2023.

Finally, if a new attempt at $120/barrel is in the cards, central banks will have difficulty fighting inflation as higher oil prices fuel inflation.


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