The price of crude oil has now given up all of the gains made after the OPEC agreement of November 2016. How long will this weakness last and how far will crude decline?
In a research piece dated March 8, 2017, published on the CME website and titled “Is Crude Oil Taking Cue from Vegetable Oils?” Economist Erik Noland notes the following:
Over the past dozen years, the relationship between movements in vegetable oil prices and ensuing changes in crude oil prices have been quite remarkable:
Soybean oil ignored the rally in crude oil prices in 2006, and later that year crude oil prices corrected lower to the level of soybean oil prices.
As crude oil was falling in late 2006 and early 2007, soybean oil prices began to surge, ahead of the massive January 2007 to July 2008 bull market rally in crude oil to its all-time high.
Soybean oil prices peaked in March 2008, four months before crude oil prices reached their all- time highs in July of that year.
Soybean oil prices hit bottom in December 2008, followed four weeks later by crude oil. By the time crude oil prices had regained their footing in February and March 2009, soybean oil was well into a rally.
Vegetable oil prices reached their post-financial-crisis peak in February 2011, almost three months before crude oil prices topped out at the end of April 2011.
While crude oil prices range-traded between $80 and $115 per barrel from 2011 through mid-2014, vegetable oil prices began a long bear market that foreshadowed the abrupt collapse of crude oil in late 2014.
Soybean oil prices bottomed in August and September 2015, almost six months before crude oil prices hit bottom in January and February 2016.
Recently, soybean oil prices have been plunging even as crude oil rallies. Does this presage a coming decline in crude oil price?
Again the direction of soybean oil appears to have lead the price of oil. It appears on both the monthly and weekly charts that soybean oil prices have bottomed in early April.
If the relationship described in the research report is correct then we should expect a crude oil bottom anywhere from now to 3 months from now.
The gold to oil ratio looks to traced out a major Head and Shoulders topping pattern and a smaller pattern within the right shoulder.
The seasonal pattern of oil prices has a tendency to rally into the end of April and decline until a bottom is created in early May. This is followed by a rally and then a decline into June.
Let us see if we can get a little more precise on price, now that we have a time frame for a bottom.
The term structure of both Brent and West Texas crude have moved lower from the peak earlier in the year but the shape of the curve has remained flat with future months in backwardation. I would be more concerned about a large drop in price if the term structure was moving towards a contango.
Late last year hedge funds had a larger bet on rising prices than any previous point in history. This position is being unwound (green line).
Inventories are still elevated but are declining.
There appears to be support on the WTI chart at both the high $44’s and $43. Note how when oil is declining it tends to ride the lower Bollinger Band down for an extended period of time. Volume has been declining but capitulation volume has not arrived, although today on May 4th this could be the beginning of a volume spike. This is one reason I still expect lower prices.
The Fibonacci and Elliott Wave chart also appear to suggest more downside.
For the time being I do not believe this is the beginning of a new bear market. I still believe this is a natural correction driven technicals and hedge fund positioning. It is quite possible oil prices will overshoot to the downside. However, I will watching the $43-44 level with interest.
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