Around the world, the price of Crude Oil has been dropping fast. I believe that short term oversupply is not the only cause here, as the drop is also accompanied by a slide in global stock markets as well. This indicates that the demand side might also be very weak and global economic activity is suffering yet another slowdown.
In my opinion, Crude prices are a great barometer of the global economy. As a keen market observer you might notice that prices fell significantly during late 1990s, early 2000s and in 2008 (refer to Chart 2). In the late 1990s, Asia went through a Financial Crisis; In the early 2000s the US suffered a post “Tech Bubble” recession and in 2008 the whole world went through a Global Financial Crisis and a depression-scare. Even the mini-crash in Brent Crude during 2012 occurred as the Eurozone entered a recession and China slowed down meaningfully.
Chart 1: Brent Crude Oil is in a mini crash over the last several weeks…
As I've already discussed, Crude prices have been in a prolonged consolidation pattern since the early parts of 2011 and a major move was about to occur in early 2014. Volatility continued to remain very compressed until June and unlike many other commodities that have been falling since 2011, Crude price managed to hold its own. That is… until now!
The initial breakout on the upside turned into a bull trap and the reversal that followed in the opposite direction has been incredible to watch (I wish I was smart enough to trade it). After peaking close to $116 per barrel during June of this year, Brent Crude currently trades at around $85… a drop of 26% in just four months.
Chart 2, below, shows that maybe prices have fallen down too far too fast, but please keep in mind that this is not a complete capitulation such as what we saw in 1998, 2001 and 2008. Various sentiment indicators that I track regarding Crude are also not close to panic levels just yet.
