Update on Oil’s Decline
The Chinese economic slow-down is sending huge shock-waves throughout the investment landscape. Commodities in general have been crushed as fears over decreased demand from China breathed new life into the downward trajectory of commodity prices. The price of oil has been declining since August 28th, 2013, when it made a swing-high above $112 a barrel. Today, after a declining period of almost 2-years, oil is trading below $39 per barrel after a total percentage decline of more than 65%. GFC has already alluded to the devastating implications this price decline is going to have on the domestic shale-producers and fracking industry as the price of economic viability for their industry is between $60-70 a barrel. Our research has also revealed that almost 20% of all corporate junk-bonds belong to the energy industry. When these bonds come due, we are likely to see a wave of corporate defaults directly related to the prolonged and depressed price of oil. However, against the recent backdrop of this historic oil decline, there are positive technical signs that oil is close to a bottom and a sizable bounce is very possible.
Looking at a recent daily chart of oil, you can see that on June 24th, oil’s decline began to embark on another leg lower which has been a sustained decline. Furthermore, this decline over the past two months has formed a very valid trendline which has acted as resistance on 4 or 5 separate occasions. Additionally, on the daily chart, the MACD (Moving Average Convergence Divergence) indicator is still indicating a bearish trend. However, it is also very close to potentially turning to bullishness. Additionally, if oil is able to solidly close above this recent 2-month trendline, it would signal an opportunity to enter into a long position and bet on a retracement rally which should be rather sizeable considerable the scope of the decline.
Looking at oil on a weekly chart, we can see that oil has traced out a 5-wave decline from August of 2013. Wave 5 is currently nearing its ending point. The price of oil has been trading as though it is intent on testing the January 2009 low around $33 which was carved out during the financial crisis. While we at GFC predict the price of oil to ultimately break though the 2009 low , however we currently view the 2009 low price area as an attractive level for oil to stabilize and mount a retracement rally. As you can see on the weekly chart, the RSI (Relative Strength Index) is indicating a bullish divergence as price declines into this area. Oil prices are making new lows, but RSI is displaying a lack of momentum and is failing to confirm these new price lows.
Additionally, GFC’s proprietary oil contango index is indicating selling capitulation among major oil investors. For the past few months oil contango levels have remained at relatively high levels indicating institutional entities were keeping elevated amounts of oil stored in off-shore tankers and were hoping to unload it domestically at higher prices. Currently GFC’s contango index is indicating oil is being moved to market and sold at current prices which should serve to drive oil to new lows in the near future. With contango levels showing more moderation, it seems institutional investors continue to be cautious about future oil prices. Stabilization in these levels and an increase in contango should indicate a more bullish outlook for oil prices; this has so far not materialized. GFC is committed to monitoring the oil market and will be sure to alert our readers when trading conditions in oil turn amicably bullish.