When considering such as bearish chart as that for crude oil, it’s interesting to play a mind game and consider it as perhaps a stock chart – an Enron or a Worldcom, and the prospect of oil going to zero. Free oil – an interesting thought and one that will never happen. Nevertheless, when price action is so heavily weighted in one direction it’s interesting to consider just how much further it can fall, before we see a bottom start to build.
And to answer my own question – the answer is not yet, and indeed the price action and associated volume profile for the start of the year is classic volume price analysis – almost textbook – with a falling market on strongly rising volume, with no evidence in this time-frame of any stopping volume or buying. It’s all one way traffic at present.
In my post of last week, I suggested that the 2009 low of $32.38 per barrel was the next target. This was duly taken out yesterday, with the oil trading session closing at $31.41 per barrel. Overnight, oil prices have moved lower still to trade at $30.74 per barrel at the time of writing. Provided this break holds, there is little ahead in the way of meaningful support, and from a purely technical perspective the target for rebasing and rebuilding now appears to be in the $24.54 per barrel area, where a very well developed platform awaits. This would also take us back to oil prices not seen since 2002.
From a fundamental standpoint, it is the confluence of OPEC politics, a strong US dollar, a glut of supply, and the lifting of Iranian embargoes that are all combining to pressure black gold ever lower. The bottom will of course come, not at zero, but in the mid-$20 per barrel range. This the point at which we are likely to witness the start of an extended congestion phase, as buying finally arrives, the buying climax begins, and oil prices then start the inevitable cycle of rising Lazarus-like from the dead to climb ever higher, perhaps even back to $147 per barrel once again. All cycles ultimately repeat, the only factor is time. It's always a case of not if, but when.