CRUDE OIL: The damp days to return, another price decline on the charts

 Hello Reader!

While the world grapples with the aftermath of COVID-19, the business and finance world is struggling to adjust to the new realities as well. With lowered top-line across most of the businesses, the emergence of new sectors, higher digitalization stands to threaten several status quo previously prevalent. over the next year, we will witness many businesses go down the same path producers of chariot whips and boot heels for men did. Evolution is the key to survival for businesses. 

But what about the cost? The lowered crude oil price has send many businesses into a frenzy. Government and businesses have openly filled in their crude oil reservoirs with what they perceived as never to return cheap prices. However, what if I told you that the lower prices were returning soon? 

A simple technical analysis of the crude oil charts across different time frames has a well-knit story of the downtrend which has been unfolding on the charts of crude oil since the crash in 2007.

Crude Oil stands at $41.8 per barrel. This is historically a very important price zone. On several different occasions in the past, crude oil has taken support at this level as highlighted in the chart below. Now, with the world being a very different place, $41.8 is posing as a strong resistance. This fungible nature of price levels is quite commonly observed across stock indices, individual stocks, currencies, and commodities. 

                                    Crude Oil: Monthly Chart- Period shown : 2009 to 2020

Lower-highs, lower-lows have been observed in crude oil post the 2007 crash. The Primary trend has been down with intermittent rallies. Since April 2020, one such minor trend upside rally has been witnessed.

A quick glance at RSI shows how a penetration below the level of 30 has meant more bad news for crude oil. Back in Dec 2014 when RSI broke below the level of 30, prices could only temporarily recover after that. Soon in Jan 2016, crude oil forged a new price low after falling 50% from its recent high of $61 to $27 per barrel.

History can be seen repeating itself. Today, crude oil price stands at the strong resistance zone of $42 PB, with lost momentum and at the edge of a cliff. It is only a matter of time when crude oil prices will fall again and forge a new below $20.  We are discussing the possibility of a 50% price slide from the current levels as indicated by RSI. 

                                    Crude Oil: Weekly Chart- Period shown: 2009 to 2020

After having looked at the monthly and weekly charts of Crude Oil, the story recited by the Daily chart is no different. It reverberates the eminent message of downfall by means of the Negative Divergence between price and RSI. Negative divergence is an indication of lost price momentum. It is especially potent when it occurs close to an important price resistance (like $42 in this case) after a prolonged rally.

All across the time horizons- monthly, weekly, and daily, the tale of weakening crude oil prices can be heard loud and clear. It is best to be cautious and brace ourselves for what is to follow. The pain of hammered crude oil price is going to resume.

 

                                    Crude Oil: Daily Chart- Period shown: March 2020 to Aug 2020. 

 That's all on crude oil. 

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Kavita Chamaria

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Crude Oil Price Crash for Dummies

Hello Readers,

The recent crude oil price crash is second only to spread of the COVID-19 globally in panic terms. The base for almost all fuels, as we know, has lost nearly 50% from the high of $65 per barrel in last 3 months, of which, nearly 32% has been recorded in the past 5 trading days alone. Crude oil prices are falling like a rock under the influence of gravity.

Two questions come to my mind here-

1) Why?

2) Until where?

To answer the first question first, we know crude oil prices are determined by two primary forces- demand and supply.

On the demand front, China has ceased to be the primary manufacturer, favourite cuisine or  emerging world economy and garnered a new reputation as the epicentre of a pandemic. In the heart of all things that China was best known for, it was also the biggest consumer of crude oil, but come 2020 and the advent of the COVID-19, it has come to a standstill with visibly lower demands for crude as organisations have stop manufacturing operations and people have stopped travelling.

The impact of this is much larger than ever priced in any scenario analysis. The pandemic has touched nearly 115 countries. The globally cascading effect of the disease- operational shutdowns, travel bans- is bound to have a palpable negative impact on demand for crude oil.

Now, the logical solution in a situation of demand set back would be to cut production. However, what is adding oil to the fire here is the current supply flux. OPEC collapsing after the failure of negotiations between Saudi Arabia and Russia to cut production in the face of an already suffering demand paradigm came as a shock for the global trading community as witnessed via the price crash.

Moving on to the next question ’until when’.

The simple answer is- no one knows. However, what we can identify using techniques of technical analysis is a probable support level for WTI Crude Oil. But before that, let’s look at the daily and monthly price charts below.

On the daily price chart, the breach of an important ‘triple bottom’ support level of $42.20 last week, combined with a ‘runaway gap’ is a knell bell and a text book set up for further price decline. The slight bounce in price witnessed after the piercing fall is popularly known as a ‘dead cat bounce’. In simpler language, it means that the bounce has no credibility, it is only an acknowledgement of the knee jerk reaction witnessed in price.

However, if we take into consideration the monthly chart above, the current price crash does not look quite as bad as those witnessed in the past. In both the big fall we have witnessed so far (2008,2014), price has forged a lower high and a lower low at every turning point, thereby confirming a primary downtrend. By definition, the term ‘bear market’ is used when a script/index/future contract has lost more than 20%. However, we are playing with much bigger numbers and calling it a mere bear trend does not do justice to the scenario we are looking at. What is worth noting is that, during both the past price crashes, support came in at approximately 70% price decline from the last peak.

To conclude, having brought to attention similar instances of price crash that have happened till date and taking into consideration that the threat of this pandemic is as real as the financial crisis of 2008 and in fact more global in nature, the pain should at least be at par with the past incident, if not worse. This brings us to the end with a lingering question that would crude prices be driven to a range of $18 to $21PB?  The potential support range incidentally is also the only price support visible on the monthly chart which is below the triple bottom support that was breached earlier this week.

Thank you, for reading!

Regards,

Kavita Chamaria