Clive P. Maund
Technical Analysis

Oil Market Update

originally published February 23rd, 2015

The oil market is one of the most interesting in the world and certainly one of the most important. Right now there are two major opposing forces determining the supply/demand balance. One is the massive glut resulting from increased production and oversupply, exacerbated by deflationary depression in various markets, and the other is the elimination or partial elimination of supply from countries like Iraq and Libya whose economies have been wrecked by war and an ensuing state of anarchy, a problem that could get worse with the Islamic State on the rampage in the Mid-East and N Africa.

Until early this year the forces of oversupply drove the oil price relentlessly lower in a spectacular crash, that caused it to drop by 60% in just 7 months as we can see on our 1-year chart for Light Crude. Then, at the end of last month we saw the first significant countertrend rally get going. Whilst we can speculate that this was partly due to an increased appreciation of the threat to future supplies especially in the Mid-East, technically this was simply a rally to alleviate the extremely oversold condition that had developed by the end of last year, and probably largely due to short covering.

The rally of recent weeks is considered to be nothing more than a bearmarket rally to alleviate the oversold condition. Fundamentally this view is supported by the fact that the massive oil glut has now virtually exhausted all available storage capacity – if so then we can expect to see another price smash probably into the $20’s, necessary to stimulate demand, and also the widespread mothballing of production. Technically the rally of recent weeks certainly looks like a countertrend rally – by completely unwinding the earlier extremely oversold condition as shown by the MACD and RSI indicators on this chart and flushing out profit takers, it has renewed downside potential, certainly sufficient to provoke another downleg to new lows. Even if oil has hit bottom, it would need to back and fill here marking out a base pattern before it could mount a sustainable rally, which action would involve a test of recent lows. As we can see the price has stalled at a resistance level and near to its falling 50-day moving average – a good place for it to turn lower again.

On the 10-year chart we can see the plunge that followed failure of key support at the 2011 and 2012 lows. At best, if oil has hit bottom, it is likely to form a base pattern involving a retest of recent lows. At worst, it is headed lower to its 2008 lows, or lower.

The oil COT chart overall looks modestly positive, but this won’t prevent further heavy losses. The uptick in Commercial short and Large Spec long positions last week is viewed as an indication that oil is ready to head lower again.

Click on chart to popup a larger clearer version.

The oil price hedgers chart, which is a form of COT chart, is in middling ground overall, and doesn’t provide much guidance one way or the other…

Click on chart to popup a larger clearer version.

Chart courtesy of

The oil price optix, or optimism index, certainly looks positive, but what may happen here is that it drops back to recent extreme low readings as the oil price makes new lows.

Click on chart to popup a larger clearer version.

Chart courtesy of

Given what has happened to the oil price, oil company stocks have held up remarkably well, as we see on the 1-year chart for the XOI oil index, and they have already made good a significant part of their losses on their rally so far this year. This extraordinary resilience is something of a mystery, but may be attributed to oil stocks being buoyed by the continuing advance of the broad stockmarket, and it may also be due to a partial failure by investors to grasp how the lower oil prices will affect future oil company results – they could be in for a nasty surprise later this year. Having stalled at the resistance level shown, oil stocks now look set to drop back with oil.

On the 10-year chart for the XOI oil index we can see that the oil price smash has hardly put a dent in the prices of oil stocks, compared to what could or perhaps should have happened. What will it take to make these stocks drop? – oil at $20 a barrel, or $10?? Tough luck if oil does drop to such prices and the broad market plunges at the same time – if this happens we will see a bloodbath in this sector.

End of update.