We talked about crude oil on February 17, and noted at the time it was the longest bear market and most oversold the asset had been since 1983. Since then, crude oil has gained 21% in an impressive reversal. We’ll take another look at oil today.
With crude oil closing at its highest level of the year yesterday, crude’s 50-day moving average is now pointing higher. It actually started to turn higher last Friday, for the first time since November 2015. This is a potential clue the intermediate-term trend is positive, and this is more than a bear market rally. At the same time, crude oil is trying to break above the trend line going back to last June. Should it close above this area for more than three days, it could be another step in the right direction for crude oil.
Source: LPL Research Bloomberg 03/09/16
As we mentioned in late February, the correlation between crude oil and the S&P 500 has been historically high so far this year. If crude oil fails to hold near this trend line and breaks back lower, that could pressure equities as well. Putting the recent reversal in perspective, crude oil has now bounced just over 40% from its February lows (which also coincide with the calendar year lows). Since 1983, only 9 years out of 33 saw crude oil make a larger reversal off of its yearly lows. But with nearly 10 months to go in 2016, this is far from over.
The size of the reversal within February was historic as well. Crude oil closed slightly higher for the month, but was also more than 30% off its lows for the month. The last time that happened was in May 2009. To put this in perspective, three months after May 2009, crude oil was up another 20%, and it was up 32% six months later.
Lastly, crude oil was down nearly 40% in each of the past two years. The last time it was down consecutive years near the -40% range was in 1997 and 1998, before it jumped 131% in 1999. The last time crude oil was down three years in a row was the early 1990s.
Source: LPL Research, CBOT 03/09/16
In conclusion, crude oil has made a very nice potential bottom off of last month’s low. Don’t forget, near the February lows many were calling for sub-$20/barrel crude oil, which is the type of negative sentiment you’d expect after an 80% drop from the highs.
At the same time, no major changes have taken place on the fundamental backdrop. The reality is there is simply too much supply and not enough demand. However, price can diverge from, and even lead, the economics sometimes; should the breakout above the trend line take place, the technicals would continue to support near-term strength.
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