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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 West Texas Intermediate (WTI) crude oil futures contract to the lowest low since January 2019. Worse yet, it is now testing psychological and technical support at $50 for the fourth time in 13 months, raising the odds for a breakdown that brings the deep December 2018 low 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 sell-off 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 would 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 has failed to post a higher high in the past four years, maintaining a secular downtrend that has 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 this paradigm shift has reached critical mass, given healthy demand as a result of the multi-year economic expansion. In addition, dwindling crude oil resources around the world in coming years are 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 that 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)
The crude oil futures contract soared from the mid-teens into the lower $40s in just four months in 1990, driven higher by the first Iraqi invasion. It settled back to earth a few months later, re-entering a multi-year trading range that broke to the upside once again in 2004 when world economies were getting back on their 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 sell-off retracement level. That marked the highest high in the past nine years, ahead of a broad trading range that broke to the downside in 2014. That sell-off 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. Crude oil printed the second lower high in seven years at that time, turning south at the .50 retracement of the two-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 the aforementioned securities at the time of publication.
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