Since the onset of violence in the Middle East, in particular the cruel and barbaric genocidal actions of the Islamic State, everyday American citizens have been perplexed by an unusual condition at the pump: lower gasoline prices. As the first salvo of bombs that were ordered dropped by President Obama found their targets in ISIS-controlled oil fields, the bearish trend in the commodities markets never ceased. Earlier in the week beginning September 21, 2014, West Texas Intermediate, or the index that tracks the performance of light crude oil, dropped below the $91 per barrel level, a price-point that hasn’t been seen for over a year. The top question on most everyone’s mind is whether or not these lower prices are here to stay.
From a technical perspective, the answer is fairly straightforward. Since the week of June 23rd of this year, the WTI index has been falling hard in a disconcertingly aggressive trend channel of lower highs and lower lows. While this may bode very well for the consumer, the fundamental implications, of which we’ll touch upon later, is hardly comforting. Moving back to price action analysis, there is little indication that the bulls are capable of mounting a substantive comeback.
We note that within the discussed trend channel, oil buyers have only initiated three significant price recoveries: mid-July, late-August, and mid-September. Of course, all have failed, petering out in impotent fashion. Of some importance is the first recovery effort (in mid-July), which saw consecutive intra-day leaps that ultimately peaked just shy of $104. Hope was sustained for several days afterwards as traders jostled for position between a relatively robust range of $102 at the low and $103 at the high. By the final week of July, however, sentiment gave out under heavy volume, leading to a severe backlash. Since that forgettable push, the other efforts to regain bullish control have been extremely short-lived affairs. Mathematically speaking, the July price action was the only time it actually challenged the 50 day moving average; subsequent bullish trades have failed to touch the lagging 200 DMA. If the “trend is our friend,” this one is screaming for investors to get out!
The three year chart is even more demonstrative. Up until late June of this year, the price action faithfully held a long-term bullish trend channel. It was not until a breakdown a few days later, followed by the aforementioned drop in valuation in mid-July that the long-term trend was inarguably broken. Recent bearishness in the broader equities sector, caused by investor skittishness towards a potential Russian nationalization of foreign assets, has placed a cap on upward price mobility in crude oil. Such conditions are unlikely to be resolved definitively in the short-term and “discount buyers” may want to wait out the volatility even further.
Those that have no interest in engaging the oil market may be led to believe that lesser pain at the pump will be a consumer’s windfall. While that may very well be true, we also must recognize that part of the lower oil valuation is tied to a lack of demand, specifically, reduced intake by China and Europe due to their underperforming economies. If conditions stay true to their present course, the U.S. may be forced to compensate for the negative balance by undertaking creative accounting.
We all know how well the last experiment went…