Black Gold Sparks

Is it possible that we could be on verge of seeing a significant multi month rally in Oil?

While it might be difficult to imagine the Oil price rising at a time of a global pandemic with differing stages of lockdown, price action and historical patterns show a capitulation low in April and indicate that the months ahead will see a surge higher, possibly up to $45-$50 again.

Starting with the fall in Brent earlier this year into the April low, the move down was remarkably similar in magnitude to the previous two most severe declines seen in late 2008 and into early 2016. Those falls were 76% and 77% respectively whereas the recent collapse from the 2019 Q3 high was 78%.

What is more, the low in Oil was marked by the extraordinary event of WTI settling below zero. Very often a major event marks an extreme for a market. We finished April with an indecision month on Brent – a feature that was seen around the lows in early 2009, Feb 2016, as well as in December 1998 when Oil based. In all cases we then saw a surge in the oil price that lasted 3+ months before any real consolidation or pullback.

Brent Monthly Chart

The cheap Oil price this year meant that its value relative to the stock market also hit an extreme – the same extreme as that seen in December 1998. This month we have started to turn again in favour of Brent despite Equities also rallying.

Brent / S&P 500 Ratio

The prevailing bemusement over the past few weeks seems to be centred on the disconnect between rising equities, rising Oil and, stranded economies. We should always remember though that financial markets are forward looking and leading, just as had been the case from late 2018. Back then we had an inverted yield curve and went into 2019 with most, including the Fed itself, thinking interest rates would rise. Instead they fell, globally.

The unfolding of the problem that is Covid-19 may not have been precisely foreseen, but then there is always a surprising blow that hits. At the start of 2020, this “fighter” (read stock market/economies) was on his way down, tired from the trade war of 2019, stretched by stock buybacks and in need of cheaper money. Coronavirus was the “knock-out punch” that hospitalized him. Today however, having started to respond to the medicine of zero interest rates and QE, there are early signs of strength with Equities and Oil bouncing back . The more doubts there are about these sparks, the higher they go because the positioning is weak.

It follows that if these rising markets continue their recent behaviour into the medium term, then the current consensus of a looming multi year depression would be questioned – a point that will be touched upon in the next article.

Technical notes: The 77% decline in Brent into the Jan 2016 low was from the 2013-2014 highs which is where we started to trend down. Similarly, the 78% fall into the low this year was from the Sept 2019 or Jan 2020 high. The $45-$50 target area is a combination of Fibonacci retracements of the last fall, the 200 day moving average, and closing of the major gap seen on 9^th Mar.

SKA