More Evidence Needed to Confirm the Oil Price Low
Russell Shor
Senior Market Specialist @ Tradu | Certified Financial Technician, Master of Financial Technical Analysis
The oil market has been hit from the demand side and the supply side. In terms of supply, the price war between the Saudi’s and Russia after the OPEC meeting on 5 March put severe pressure on oil’s price as supply increased dramatically. Prior to this meeting demand was already weak as economic activity, particularly in China was tepid.
However, the Covid-19 pandemic and the resulting global lockdowns, exacerbated the already low demand to even further extreme levels on the low side. Thus the glut worsened and price trajectory had nowhere to go but down.
Last week, the crude market found support as major oil producers led by the Saudi’s and Russia did, in fact, start cutting production from 1 May by 9.7m bpd. Moreover the top US producers, Exxon Mobil and Chevron are looking to cut output by 400,000 bpd. We also note that the lockdown conditions will soon be relaxed somewhat, with the global Covid-19 cases showing signs of tapering, and there is certainly pent-up demand.
However, in all likelihood, the recovery will be very slow. Consider the following chart:
Above we have FXCM’s proxy price for Brent (UKOil) represented by the black line and its proxy for WTI (USOil) represented by the blue line. We refer to the period just after the GFC, which saw oil bottoming around February 2009. Here the MACD (red line sub-chart) was below zero and the MACD histogram (sub-chart) started ticking up as the recovery unfolded (1st green trendline).
Oil reached another low around February 2016. Again the MACD (red line sub-chart) was below zero and the MACD histogram (sub-chart) had started ticking up (2nd green trendline). The MACD histogram was premature this time around, however, oil locked in a bottom very soon afterwards.
We consider the current period: the MACD (red line sub-chart) is again below zero but the MACD histogram is yet to signal a bottom (green ellipse). Whilst we may have seen the low for energy, technically we need more evidence from the histogram to confirm this. We want to see it ticking up before calling for an end to the downtrend.