Charts suggest upside for oil is limited despite short-term rallies, Jim Cramer says

CNBC’s Jim Cramer said Tuesday that while the price of crude oil might see some gains, it’ll be limited in duration and scale, leaning on analysis from DeCarley Trading commodity strategist Carley Garner.

“The charts, as interpreted by Carley Garner, suggest that the good news for oil might be mostly baked in, meaning the upside is limited. … Just keep in mind that while oil rallies, they tend to happen in the blink of an eye, oil sell-offs are just as quick,” the “Mad Money” host said.

Before getting into Garner’s interpretation, Cramer laid out two fundamental facts investors should be aware of to understand the analysis.

• The U.S. West Texas Intermediate crude oil futures contract is a major benchmark for the overall price of oil. It’s also “among the healthiest, least volatile energy futures in the world,” Cramer said. 
• It’s difficult to predict oil prices in a wartime situation. “We’ve got lots of political and economic turmoil, with the end result being tremendous volatility in the energy markets, coupled with shocking moments of illiquidity … as traders react to tight oil and gas supplies while they attempt to hedge against inflation,” he said.

Cramer started his explanation of Garner’s analysis by examining the weekly chart of the West Texas Intermediate crude. 

WTI crude settled $1.80, or 1.58%, lower at $112.40 per barrel on Tuesday.

Garner says that measuring bull and bear markets by 20% swings shows the chart’s already had a year’s worth of price movements, according to Cramer. “In early March, we were seeing 20% swings practically every day. Since then, the volatility’s gotten less” intense but is still wild compared to history, Cramer said.

He also said that the price of WTI crude broke through its trendline ceiling of resistance when Russia invaded Ukraine, while before it had an “expanding wedge pattern,” according to Garner.

“If West Texas crude breaks down below $102, down about $10 from where it’s currently trading, then we can potentially go back to the wedge. If that happens, Garner thinks it could potentially lead to mass liquidation that takes oil back to the $70s,” he said, adding that high prices and global efforts to tamp down inflation will eventually slow demand.

Cramer also examined the Relative Strength Index, a momentum indicator, at the bottom of the chart. “While it’s currently pointing higher, it’s also nearing overbought levels. In the short-term, Garner thinks crude could have more upside, but eventually, she sees prices coming back down to the levels we would’ve seen before Russia invaded Ukraine. We just don’t know how long it will take,” he said.

Next, the monthly chart of WTI crude shows that since the widespread adoption of fracking, oil has had a ceiling at $120 a barrel – with prices briefly going higher when Russia invaded Ukraine – but failed to close above that level on a monthly basis. Garner doesn’t believe oil will be able to breach the $120 ceiling on its second attempt, Cramer said.

The monthly Relative Strength Index is already overbought, he added. “That tells Garner oil prices are already extended and vulnerable to a swift decline if traders are ever given a reason to change course.”

Next, Cramer looked at the daily WTI chart, which he said shows that oil prices have shed a triangle pattern.

“That’s catapulted crude higher, and while Garner could see a bit more upside in the near future, there’s also two ceilings of resistance, one at $115 and one at $120. Plus, as time goes on, she expects Wall Street’s focus to shift from supply constraints to the demand side of the equation,” he said, adding that he disagrees with her assessment.

“At the moment, I think oil still looks good. … As long as Russia’s a pariah state, oil’s got a strong floor underneath it,” he said.

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