Crude Oil Technical Analysis

OPEC and the United States seem to be sending Bullish signals to the Crude Oil market. OPEC and Russia appear to be setting the stage to keep oil cuts going despite a vanishing glut that caused them to engage the production curbs in the first place. Second, shrinking US Oil stockpiles are showing a tighter physical market per the EIA report on Wednesday that puts pressure on physical buyers to buy now and hold as the benefits of carrying the physical exceed the costs as evidenced by backwardation.

These developments have led to Crude futures surging nearly 3% in New York with the price pushing closer to the $70/bbl mark for WTI and $75/bbl on Brent for June settlement. For the former, there remains a confluence of technical resistance from Fibonacci levels near the $70/bbl mark that could be seen as a place for buyers to take profits should the fundamental data develop fault lines.

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The crude oil Elliott Wave analysis on the weekly price chart shows a bearish pivot may be occurring near current levels to retrace a significant portion of the previous two-year uptrend. On a weekly crude oil price chart, the Elliott Wave pattern we are following is that the current rise from the 2016 is a wave 4. We are showing this fourth wave as subdividing as a double zigzag pattern labeled W-X-Y. This pattern in general is a bearish pattern and suggests a deep correction may be on the horizon for crude oil prices.

Dialing in to shorter time frame charts, we can see an Elliott Wave chart that is nearing its terminal point if it has not reached it already. The first one is a very bearish scenario depicted on the left side above. This shows wave (b) of Y as a sharp correction that ended on February 14 followed by an ending diagonal pattern higher. Ending diagonal patterns can appear at the end of a long trend and signals a tiring trend.

Using the rules of the Elliott Wave principle, we can place a maximum price potential of this pattern at $74.52. If crude oil prices press beyond $74.52, then another pattern is at play and the diagonal is eliminated.

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Crude Oil Price Forecast Talking Points:

• The ONE Thing: Demand dynamics and supply shocks help to keep oil supported. While volatility appears set for a higher average than 2017, which is not saying much as it had the lowest realized cross-asset volatility in multiple decades there appears to be no room for gold to test crude's dominance of the market. Metals remain mixed as higher rates keep traders away from the non-yielding yellow metal while backwardation continues to support crude. Even base metals are losing their flavor on slowing demand growth in China.
• Last week, President Trump ordered the reinstatement of Iran sanctions: While crude outsiders may see that as the key bullish driver, the demand dynamics remain in the driver seat as supply shocks may continue to arise and help take crude toward bullish targets of $77/bbl, which marks the 61.8% retracement of the 2014/2016 range.
• OPEC raises their 2018 demand forecast helping to show the physical market may tighten further.

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Crude has fallen nearly 12% with the latest move lower generated from the news that the US has ‘quietly’ requested that the Saudis and other OPEC producers to hike production by some 1mm bpd. There remains little else aside from the non-verified headline. However, this makes the June 22 OPEC meeting all the more interesting. Traders are continuing to watch the US Dollar, which continues to pull-back from YTD highs of 94.60, but remains above the 26-day midpoint of 92.84.

In other news, Central Asia’s largest oil producer, Kazakhstan is said to validate the view from Saudi Arabia and Russia to start scaling back the production curb program. Kazakhstan’s Energy Minister said in an interview that “the OPEC+ deal may be reconsidered toward softening” followed by “there is almost balance in the oil market.” All this points to a lack of tightness in the market that is likely concerning to bulls.

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When taking a glance at the performance of investments in stocks, currencies, and commodities -- which is compiled by the Wall Street Journal for the second quarter of 2018 -- one is struck by the fact that all of the top five performers were commodities. Lean hogs took the top honors, followed by crude oil.

Crude’s position didn’t surprise me. Way back in February 2016 -- when West Texas Intermediate (WTI) was trading at $26/bbl. -- I was confident that crude oil would make a relentless climb. How could I have been so confident then, and confident now, that today’s WTI price of $69.50/bbl. will climb to $75/bbl. by year’s end?

To answer these questions, we must have a model -- a way of thinking about the problem. In this case, the starting point is Roy W. Jastram’s classic study, The Golden Constant: The English and American Experience 1560-2007. In that work, Jastram finds that gold maintains its purchasing power over long periods of time, with the prices of other commodities adapting to the price of gold.

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Backwardation is rising again, and that’s good news for bulls. The spread between December 2018 and December 2019 has widened in favor of Dec. 18 showing a demand premium that will likely continue to support the bullish argument. The rise came after the largest stockpile drawdown of crude in the US in four weeks per weekly EIA data.

Weekly EIA data showed a bigger-than-expected draw of nearly six million barrels against an expectation of two million barrels making for a bullish read on the weekly inventory report. The US’ strategic petroleum reserve (SPR) was a part of the petroleum report that showed a drawdown of 2.5 million barrels.

Markets are in high demand-season in late-August, but in prior weeks the trade war rhetoric had taken over to make fears of lower global demand the running theme that markets were pricing. WTI & Brent now is only trailing the NASDAQ as the best performing global asset showing it holds a similar resilience as equities despite concerning narratives that continue to float.

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Crude Oil
It appears the current Elliott Wave count for crude oil is wave (c) of circle ‘y’. With circle wave ‘y’ being a zigzag pattern, that means wave (c) is a terminal wave. Therefore, when this current wave finalizes, a large reversal may be at hand. The two day price chart shows some overhead supply and resistance forming near 77.31 and 80. Back in June 2012, crude oil prices were supported at 77.31. This level has subsequently broken and therefore, 77.31 may act like resistance moving forward.

Natural Gas
The bearish Elliot wave pattern we are following is that of a large complex correction that began from the 2016 price high (left side of the chart above). As the name states, this pattern is complex and may turn lower from levels just above current prices. At 3.28, wave (y) is equal in length to wave (w) so it may be a near term pivot level. Around 3.40, the blue resistance line crosses so it may provide resistance to natural gas prices too. The challenge with this wave count is the visual structure. The form of the waves are not an ideal shape of a (w)-(x)-(y) pattern.

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The long-term trend in oil is down and it has been since the pre-recession peak up near 150 in early 2008. Since then, it's been unable to move higher than that top. The direction of the line connecting that 2008 peak with the lower 2013/2014 peaks is unmistakably downward.

The uptrend line connecting the low in 2016 to the 2017 low has been broken. Oil has closed below that trend line for 2 weeks in a row now -- and it's back inside the Ichimoku cloud range.

It's that unrelenting selling, day after day, in October that's reversed the weekly trend and has reverted price direction back to the longer-term pattern seen on the monthly chart.

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Our previous longer-term Elliott wave forecast for crude oil from October 3 suggested a meaningful top may form near 77.31 or possibly 80. We later know that a high was formed that day at 76.88 in route to a 35% decline.
Therefore, we can consider the ((y)) wave complete which formed from August 30, 2017 to October 3, 2018. It is possible we can consider the whole upward sequence from February 2016 to October 3, 2018 as a complete wave. The ((y)) wave formed in 13 months so the implication is for a multi-month down wave that likely persists into 2019.

As is the case with any movement, the market does not trade in straight lines. We have enough evidence in place to consider the shorter-term wave over and a relief rally may have begun. This is a relief rally we expect to be a partial retracement of the downtrend and we expect it to hold below 76.88. Potential stopping points for this relief rally include 58.11 which is a former support level from early 2018. If that does not contain crude oil prices, then the market may find resistance near 65-68 which is a former congestion zone.



Natural Gas Elliott wave bullish pattern appears incomplete exposing 5.00

The bullish move made itself known and the recent high in Natural Gas prices is considered wave ((iii)). Natural Gas appears to be digesting sideways in a wave ((iv)) triangle which is common. The Elliott wave triangle pattern appears very mature and is nearing its end. A dip to about 4.15 would be normal and the triangle as displayed is valid so long as Natural Gas prices remain above 3.99.

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Lower oil prices could boost Modi’s chances to be re-elected in 2019, provided that his administration is doing things right this time around.

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