Investing.com -- Bank of America (BofA), in a note dated July 28, has issued a stark warning that the oil market is on the precipice of a dramatic breakout. After over a year of trading within a tight range – a pattern technically known as a triangle – analysts believe the market is poised for a sharp and sudden move.
The Bermuda Triangle Analogy
BofA likens the current oil market to the Bermuda Triangle, where things are said to disappear without a trace. In this case, the disappearance could refer to the potential evaporation of macro risk premiums, global demand concerns, or hopes for extended supply cuts. These factors have been key in keeping oil prices relatively stable.
A Tight Coil Ready to Spring
The brokerage’s technical analysis indicates that the oil market has been undergoing a period of compression, much like a tightly wound spring. This suggests that a violent release of energy – in the form of a significant price movement – is imminent.
Bearish Bias
BofA’s primary outlook is bearish. The analysts believe that the oil price is likely to break down from the triangle pattern and decline to the $63.02 to $60 per barrel range by the end of the year. A weekly close below $78 per barrel for Brent crude would solidify this bearish view.
Bullish Counterargument
However, the brokerage flagged the possibility of a bullish breakout. If oil prices can sustain levels above $77.18 per barrel and breach the $89 per barrel mark, it could signal a bullish reversal and potentially propel prices to $105 per barrel.
Long-Term Perspective
BofA maintains a secular bullish outlook on oil prices, with the recent period representing a cyclical bear market within a broader uptrend. Analysts believe that a decline to the $63.02 to $60.00 range would mark the end of this cyclical downturn.