Oil Needed A Pullback

Oil Needed A Pullback

Crude oil followed stocks lower on March 22 in a correction that was overdue

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The price of crude oil had a rough time over the final three months of 2018. The price of nearby West Texas Intermediate crude oil dropped from a high at $76.90 at the start of October to a low at $42.36 in late December, a decline of 44.9 percent. An almost perfect bearish storm in the energy commodity drove the price within 31 cents of the June 2017 low which was the critical technical support level.

In hindsight, the selling in the oil market took the price to a level that was unsustainable on the downside. Before the end of 2018, crude oil began a recovery that took the price to a high at $60.39 per barrel which was just slightly above the 50 percent retracement of the move to the downside. Crude oil reached its high on March 21, but the price appears to have run out of upside fuel and was trading at around $58.50 on Friday, March 22. 

Source: CQG

As the weekly chart shows, it took three months for crude oil to drop by almost 45 percent, and over the past three months, the price recovered about half the losses. Crude oil fell dramatically during the fourth quarter of 2018, but the recovery so far in 2019 has been another case of the market that takes the elevator to the downside and the stairs higher.

The latest Fed meeting on Wednesday, March 20 told markets that the US central bank would take a more dovish approach to monetary policy with no further rate hikes in 2019 and the end of balance sheet normalization on the horizon in September. Typically, a dovish Fed causes stocks and bonds to move higher and the dollar lower which is a bullish scenario for commodities like crude oil. However, the reasoning behind the Fed’s pivot from tightening credit to a more accommodative posture was a downgrade in the central bank’s projections for GDP growth to 2.1 percent in 2019. Slower economic growth tends to cause the demand for energy to decline.

At the same time, the future of economic growth in China will likely depend on the outcome of trade negotiations over the coming week.

Crude oil had come a long way from the late December low, but at over $60 per barrel, a technical pullback was overdue in the energy commodity. Meanwhile, the oil market and stock, have correlated closely over the past months. Crude oil moved lower with stocks over the final three months of 2018 and had been recovering with equity prices so far in 2019. On Friday, March 22, both stocks and crude oil suffered corrections.

I am not bearish on the prospects for the price of WTI crude oil. It would be healthy for the market to pull back to the $55 to $57 per barrel level before testing above the $60 level once again. I will be a scale-down buyer of crude oil over the coming sessions. The first level of technical resistance stands at the early March low at $54.52 per barrel. I would be surprised if the price declines below that level.

 

 

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