The recent downward price trend in Crude oil may have surprised many traders. Just before the US Fed raised interest rates on June 15, 2022, Crude oil was trading above $120ppb. Less than five days later, it collapsed by -12% and has continued to trend lower. Currently, Crude oil is near -17% lower than recent highs.
It appears Crude oil has confirmed resistance near $120 and is devaluing as consumers pull away from traditional driving/spending habits while the Fed aggressively attempts to burst the inflation bubble. This type of contraction in Crude Oil is very similar to what happened in 2008-09 when the Global Financial Crisis (GFC) hit—Crude oil collapsed more than -70% after IYC started trending lower in 2007.
CONSUMER DISCRETIONARY SPENDING MAY BE LEADING CRUDE OIL DOWNWARD
On June 9, 2022, I published a research article (see here) highlighting the correlation between Crude Oil and the iShares US Consumer Discretionary ETF (NYSE:IYC). In this article, I suggested any breakdown in IYC below $60 may prompt a broad downward price trend in Crude Oil—possibly targeting the $75 to $85 price level.
Looking at the chart from our June 9, 2022 article, we can see IYC has already fallen more than -34% from recent highs. In 2007, peak oil prices were reached well before IYC declined by more than -22%. So, in this case, the recent decline in IYC may already be predicting a downward price trend in Crude oil—possibly targeting levels below $80 eventually.
AGGRESSIVE FED ACTION MAY PROMPT EXTREME CONSUMER ACTIONS
Oddly, the 2008-09 GFC represented an extreme excess/speculative phase in the US Credit/Housing markets. Today, we see many similar facets after the COVID-19 event — where house prices skyrocketed from +25% to +45% in some areas. Additionally, before 2007-08, we saw moderately high inflation levels; Crude oil was trading above $100 ppb, certain commodities were in very high demand, and consumers were spending aggressively on almost everything.
Today, we see a combination of some factors from the GFC as well as the DOT COM bubbles. Not only have house prices and raw commodities seen incredible rallies over the past 5+ years, but the technology and innovation sectors have also been leading market gains. Bitcoin rallied from under $1000 to a high of nearly $70,000 over the past 5+ years. The recent excessive speculation in the global markets is evident in various sectors and assets.
GLOBAL CENTRAL BANKS ARE RUNNING THE SHOW (AGAIN)
I believe the US Federal Reserve will continue to raise rates aggressively in an attempt to tame inflationary trends. At the same time, we will likely see many global Central Banks attempt to follow the US Fed in raising rates. This creates an economic environment many traders are unprepared for—an extended stagflation/recession period.
The downward trend in Crude oil and IYC may be the canary for the global economy and what to expect going forward. When consumers pull away from traditional pending habits, we will likely see a broad contraction in global GDP and other economic factors.
Traders and investors must stay cautious of various global market trends and move back towards a more traditional method of managing their capital. The global markets are still 3x to 5x more volatile than at any time in recent history. Any aggressive trading style could lead to massive losses—as we are likely to see in many global Hedge Funds and managed accounts.