Commodities | 11:18 AM
Crude oil has had a terrible time post its March 2022 peak and while commodities sentiment is rising, charts and history suggest the next bull market for oil requires a much deeper sell-off first, DeCarleyTrading.com's Carley Garner reports.
- Having peaked in March 2022, the oil price has firmly trended south since
- Charts and market sentiment suggest no meaningful bottom in place as yet
- History suggests the next bull market is only possible after a larger flush to the downside
- Mid-to-low US$40.00s bottom seems highly likely, with potential deeper target
By Carley Garner, DeCarleyTrading.com
Crude oil has been a slow-motion train wreck. What’s next?
The oil market has been in a perpetual decline since peaking in March 2022; this is ironic, as at the time, market sentiment for energy commodities was arguably at its highest level since the 2008 peak.
Both of these historical summits were accompanied by the most bullish fundamental story imaginable. In 2008, analysts were focused on the Peak Oil Theory.
This was the idea that oil is a finite resource, so discovery and production rates eventually plateau and decline, forcing prices higher. Because of this and a hot economy, market participants pushed prices to US$150 per barrel; at the time, analysts were sure we would see US$200, or even US$250, sooner rather than later.
While the Peak Oil Theory is obviously true, eventually, fracking shattered the idea that peak supply would occur in the early 2000s. We have yet to see prices regain US$150 per barrel.
In 2023, the Russian invasion of Ukraine and the sanctions placed on Russian oil in the aftermath led traders to believe oil should be priced near US$130 per barrel.
It was, briefly, but contrary to the expectations of most analysts and traders, that price was temporary, not permanent. In commodities, it rarely pays off to be exposed to markets in the direction of the herd; these two oil examples are the norm, not the exceptions.
That said, both the chart and market sentiment suggest we have yet to see a meaningful bottom in oil.
In previous bear market cycles, the low of the move didn’t occur without capitulation in mood and price, with the RSI (Relative Strength Index) reaching below 30 on a monthly chart (it is currently near 40.0).
Lastly, the Trump administration is taking some heat on the cost-of-living debate and inflation. Accordingly, they have targeted oil as a tool in their toolbelt to battle higher prices elsewhere and have adopted a “drill, baby, drill” mentality.
During Trump 1.0, oil prices spent most of the time below US$65.00; we suspect he will try for a repeat, but, as we know, Presidents can influence prices through policy but cannot control them.
It should be noted the Biden Administration’s SPR drainage was the nail in the coffin of the oil bull in 2022. We believe lower prices were inevitable, but this move changed the hearts and minds of traders, and it likely sped up the process.
In the previous two decades, we haven’t seen oil trade meaningfully below US$65.00 per barrel without a move to the low US$40.00s and the next bull market was only possible after a larger flush.
For example, in 2008, oil prices fell below US$65.00 and eventually plunged to US$32.00 per barrel. The bull market that followed didn’t break below US$65.00 until 2014; that bear market held support in the low-US$40.00s three times before succumbing to a capitulation sell-off that reached a low of US$26.00.
The next bull market traded above US$65.00 briefly before breaking below in 2018; it, too, found support in the low US$40.00s before finally collapsing to US$20.00 per barrel. Of course, this was the infamous covid oil crash in which the front-month contract fell below zero.
However, few traders were participating in that expiration month, and the back months mostly traded between US$15.00 and US$20.00. So, for all intents and purposes, we can assume it held the blue trendline that dates back to the 2009 low. For perspective, if this trendline is retested, it would mean US$15.00.
We aren’t convinced that will be the case; after all, it will take some sort of unforeseen fundamental shock for that type of despair to be possible. Yet, it is important to know that three out of three previous cycles have ended in such a move.
Nevertheless, the mid-to-low US$40.00s are highly likely to be seen. In the meantime, rallies should be limited to US$65.00 (historical pivot) or US$70.00/US$72.00 (monthly trendline).
Turn of the Year Rallies are Common in Oil
Short-term seasonality could trigger speculative buying, but we urge traders not to assume the bottom is in if it does. In fact, it will likely be another failed rally, as we have been seeing for nearly 4 years now.
In the last 15 years, crude oil futures have rallied in the final two weeks of the year on 13 occasions. Similarly, as the chart below shows, 30-year data suggest oil prices weaken from October through early December but then post a 2- to 4-week rally around the turn of the year.
The Daily Chart Should Lure Dip Buyers
While the big picture looks bleak for oil, short-term traders will likely want to be bullish as seasonal strength approaches.
We’ve noticed on the daily chart that whenever prices test the current trendline, and the William’s %R indicator is in oversold territory, dip buying produces a short-lived rally.
We would expect that to be the case in the coming weeks. If it does, there will be resistance at the 200-Day moving average near US$61.00.
A break above US$61.00 could repeat the May rally, in which prices briefly pierced the 200-day moving average and reached near US$70.00.
But as the monthly chart reveals, there will be powerful trendline resistance there.
Natural Gas has an Important Pivot Price, too.
Like the US$65.00 mark in crude oil, natural gas futures have habitually reacted to the US$3.60 price level. US$3.60, or in the vicinity of it, has both launched and crushed bullish moves.
In short, above this level the market behaves bullishly, and it is bearishly below it. Remember, sentiment drives prices, and once the market assigns a pivot price, humans tend to emotionally react accordingly as prices move above or below it.
What happens at US$3.60 in natural gas will matter; if we fall below this level, which is marked by the 200-week moving average and a simple trendline from the early 2024 low, we could see a massive slide toward US$2.40.
If it is held, US$6.00 could be in the cards!
The Commodity Sector isn’t Thriving
There has been some chatter about commodities making a comeback, but we see this as a premature victory lap.
Despite several commodity indices ticking higher, they are being driven mainly by gold, silver, and copper.
If you remove the metals, the Bloomberg Commodity Index is likely trading near its 2016/2019 consolidation level.
Conclusion
Commodities in general, and crude oil, will see another bull market, but history suggests it won’t start from the US$50.00s.
Given the relatively weak dollar (which is supportive of oil) and the lack of US oil industry investment in infrastructure (also supportive), perhaps the low US$40.00s will be enough to turn the tide as US producers tap the brakes on production.
Still, unless this time is different from the previous three cycles, we could see a quick probe to much lower prices to wipe the slate clean for the next bull market in oil.
DeCarley Trading (a division of Zaner)
Twitter:@carleygarner
info@decarleytrading.com
www.DeCarleyTrading.com
www.TradingCommodityOptions.com
www.HigherProbabilityCommodityTradingBook.com
Re-published with permission. Views expressed are not by association FNArena’s.
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