Crude oil could come under pressure in the coming months, with Chinese tariffs undermining record U.S. exports while an economic slowdown and supply glut shift the supply-demand equation in favor of lower prices. The decline could be more devastating to U.S. production and exploration companies than the West Texas Intermediate (WTI) or Brent futures contracts, with many stocks in those sub-industries already trading at decade lows.
China has now imposed a tariff on U.S. crude oil imports that will oscillate from 5% to 10% in a "floating range." The number could rise further in the fourth quarter because the Asian nation chose not to retaliate after President Trump responded to the announcement by increasing his already announced tariffs against China. A lot depends on elusive September trade talks, and the two superpowers still haven't agreed to a date or format.
The $50 level remains an important psychological zone for the WTI contract, with price action crisscrossing the magic number repeatedly since 2015. A failure to hold that level four years ago generated a brutal selling climax, dropping the contract to a 13-year low in the mid-$20s. A similar slide into the new decade could be devastating, completing a breakdown pattern going all the way back to 2004.
Crude Oil Long-Term Chart (1990 – 2019)
The WTI contract shot higher at the start of the first Iraq war in 1990, reaching $41.15 before turning tail and settling into a narrow trading range that broke to the downside during the 1997 Asian Contagion. It remounted broken support in 1999 and surged within five points of the prior high in 2000. A higher 2001 low set the stage for a second buying wave after the Sept. 11 attacks, stalling within two points of 1990 resistance in 2003.
Bullish action completed a breakout in 2004, generating a powerful uptrend, underpinned by renewed growth after the 2000 to 2002 bear market. Demand was especially strong in China and other BRIC nations, underpinning a parabolic rally wave that posted an all-time high at $147.27 in the summer of 2008. The contract plummeted with world markets in October, undercutting breakout support before bottoming out at year end.
A recovery wave into the new decade stalled after mounting the .618 Fibonacci sell-off retracement level and eased into a symmetrical triangle that broke down in 2014, confirming a lower high in the long-term price pattern. The breakdown also set off a worldwide commodity decline that continued into the first quarter of 2016. Crude oil undercut the 2008 low during the rout, posting the lowest low since 2003.
The bounce into July 2018 reversed at the .382 retracement level of the original 2008 decline, potentially carving the second lower high since 2011. In turn, the next decline into support at the 1990 low will also complete a massive descending triangle pattern that has the potential to drop the contract into the teens. However, there isn't much to do in 2019 except to wait and watch, with price action now struggling at narrowly aligned 50- and 200- day exponential moving average (EMA) resistance near $60.
The monthly stochastics oscillator hit the most extreme overbought technical reading since 1999 in January 2018 and crossed into a sell cycle, reaching the oversold level during the fourth quarter swoon. The buy cycle into 2019 failed in May, presaging the failure in bilateral trade talks. This bearish signal has been increasing in the third quarter while the contract trades a few points above $50, in a potent combination that favors a breakdown in the fourth quarter.
The Bottom Line
Bearish stars are aligning for a WTI crude oil futures contract breakdown through psychological support at $50.
Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.