Crude Oil Futures Hit 13-Month Low

U.S. stocks and indices have lifted to new highs in a dramatic recovery from the initial wave of coronavirus fears but the world’s energy markets have not, dropping the WTI crude oil futures contract to the lowest low since January 2019. Worse yet, it’s now testing psychological and technical support at 50 for the fourth time in 13 months, raising odds for a breakdown that brings the deep December 2018 at 42.36 into play.

As a consumer, you might think that cheap crude oil prices are great for the economy and your family’s bottom line. However, the contract is a highly-cyclical instrument that tracks economic expansion and contraction with surprising accuracy. Right now, the selloff is waving a red flag, telling us that energy traders are worried that world economies will enter recessionary waves as a result of China’s isolation and the potential escalation into other parts of the world.

More importantly from a technical standpoint, a decline into the 2018 low will mark the next phase in a massive 17-year descending triangle pattern, with support at the 2009 low in the lower 30s. The contract last tested that critical level in early 2016, breaking down into the mid-20s before reversing gears and remounting broken support. It’s failed to post a higher high in the last 4 years, maintaining a secular downtrend that’s now entered its 12th year.

Climate Change At Work?

Climate activists may view crude oil’s decline as a positive development, with more industries moving away from fossil fuels and into carbon-neutral energy sources. However, it’s unlikely that paradigm shift has reached critical mass, given healthy demand as a result of the multiyear economic expansion. In addition, dwindling crude oil resources around the world in coming years is likely to generate a premium for the commodity, with remaining users forced to pay up due to lower supply.

Fortunately, the evolution of crude oil prices has been moving at a snail’s pace, telling market players there’s plenty of time to take action if exposed to the industry through energy stocks or the futures markets. However, as we learned in 2008, contract volatility can escalate rapidly in response to system shocks like that year’s economic collapse, so it makes sense to keep a watch on price action at all times.

Crude Oil Long-Term Chart (1990 - 2020)

CL - Futures

The contract soared from the mid-teens into the lower 40s in just 4 months in 1990, driven higher by the first Iraqi invasion. It settled back to earth a few months later, reentering a multiyear trading range that broke to the upside once again in 2004 when world economies were getting back on the feet after the burst Internet bubble. The uptrend went parabolic in 2006, driven by heavy speculation as a result of China’s multi-trillion dollar industrial expansion.

A vertical plunge followed 2008’s all-time high at 147.47, dropping the contract into a test at breakout support in the first quarter of 2009. It made steady progress into 2011, finally reversing a few points under the .786 Fibonacci selloff retracement level. That marked the highest high in the last 9 years, ahead of a broad trading range that broke to the downside in 2014. That selloff printed the first lower monthly high for the contract in more than two decades.

The decline found support at the 2009 low at the start of 2016, giving way to a healthy uptick that stalled after President Trump fired the first shot of the trade war in 2018. It printed the second lower high in 7 years at that time, turning south at the .50 retracement of the 2-year slide. This downturn found support in the low 40s at the end of the year but the contract failed to make headway in 2019 and may be headed into a critical test at the 2016 low.

The Bottom Line

The WTI crude oil contract may have entered the next phase of a massive descending triangle pattern that forecasts much lower prices in coming decades.

Disclosure: the author held no positions in aforementioned securities at the time of publication.


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