West Texas Intermediate (WTI) and Brent crude oil futures contracts plummeted when world markets reopened on Sunday evening, dropping more than 24% after Saudi Arabia sharply lowered the price of crude for delivery, starting in April. The move was a reaction to failed Organization of the Petroleum Exporting Countries (OPEC) talks with Russia but also intended as a warning to the United States, which will be forced to suspend a majority of current production if prices remain at current levels.

The futures contracts had been losing ground since the first week of January, with losses accelerating after the coronavirus outbreak spread to Western nations in February, triggering concerns about a worldwide slowdown. The decline made sense because energy markets are cyclical in nature, rising when world economies are growing and falling when cycles roll over into recessions and depressions.

The Saudis were perfectly aware that crude oil had already fallen more than 35% when they made the announcement, which was obviously intended to start a price war greatly affecting U.S. production. However, local producers have time before they have to act and are likely to sit on their hands for now, waiting for stimulus measures proposed by President Trump on Monday evening to play out in the futures pits.

Chart showing the performance of the WTI crude oil futures contract (CL)
TradingView.com

The WTI Crude Oil Futures contract has carved a massive descending triangle in the past 17 years, with a series of lower highs that connect perfectly with a trendline starting at 2011's all-time high above $140. It reversed at resistance for the second time in 2018 and has now reached triangle support for the third time in 12 years. Ominously, this pattern is highly bearish when applied to stocks, but a breakdown in this case generates a measured move target well below zero, which isn't possible.

Even so, the descending trendline will mark heavy resistance during future rally efforts, limiting upticks into the $50s or $60s. It's also possible that we're looking at a bearish long-term setup that unfolds in future years when climate activists have their way and force world governments to abandon fossil fuels. That isn't unrealistic because the pattern has already stretched across two decades, and the shift away from fossil fuels has begun to accelerate.

In the shorter term, the contract could easily spend the next month filling Monday's gap while world energy markets await the Saudis' first April delivery. OPEC members could reach an agreement to cut output during this period, triggering a rapid recovery that lifts crude oil back into the $40s. Just keep in mind that, the longer the contract bounces around in the lower $30s, the easier it will be for gravity to take control once again and undercut 2016's 17-year low at $26.05.

Chart showing the share price performance of the SPDR Select Sector Energy ETF (XLE)
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The SPDR Select Sector Energy ETF (XLE) got obliterated after the news, dropping more than 20% through the 2009 low before hitting a 15-year low at $33.73. The decline that started in 2014 has now cut through harmonic support at the .786 Fibonacci retracement level of the 2002 into 2014 uptrend near $37. In turn, this establishes a new downside target at the 100% retracement, or 2002's all-time low in the upper $20s. 

It's also possible that the .786 violation will be repealed in coming sessions, allowing the fund to establish a basing pattern in the upper $30s. That would be a bullish turn of events because this Fibonacci level often marks the lowest low of a downtrend, ahead of a long-term recovery wave. We'll just have to wait and watch this instrument along with crude oil in coming weeks to make a final call about the long-term implications of this week's sector crash.

The Bottom Line

Crude oil has completed a massive descending triangle pattern that predicts even lower prices later this decade, but the contract and energy stocks may be close to an intermediate bottom.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.