Does the Crude Rally Have Legs Left? Or Is It Running Out of Steam?

Crude oil has had a rough week this week, down nearly 5% for the week as of Thursday night. Considering as of four months ago crude oil was in the midst of its worst bear market in history, a 5% dip after nearly doubling in value over the past four months puts things in perspective.

Crude bottomed near $26 per barrel on February 11 and last week it nearly reached $52 per barrel—that comes out to nearly a 100% gain in just under four months. That sounds like a large gain, but where does it rank in history? Using data going back to 1983, only two other times in history did crude oil gain more than the 89% it gained in two months (42 trading days) after the February 11 lows.

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Only September 1990 and June 2009 saw crude gain more in a four-month period than the recent rally. Three months after the 1990 spike, crude dropped 25%; and six months later it was down 44%. The 2009 spike was down 1% three months later and down 3% six months later. Going out 24 months, however, the 1990 spike was still down 38%, while the 2009 spike was up an impressive 37%. In other words, after a good deal of consolidation, the 2009 spike was in the midst of a larger bull market, while the 1990 spike peaked with the rally.

So, which is it? Will crude peak here and now like it did back in 1990? Or will we look up in two years and realize there are still many more gains yet to come? Well, the one major similarity between now and 2009 is the rally took place after a huge bear market. We came into 2016 looking for potential stability and a rally in crude. That has happened, and as supply and demand continue to come in alignment, crude could continue to stabilize near the $50 per barrel area. Should crude hold around this area, the best opportunities could potentially come from oil-sensitive asset classes such as master limited partnerships (MLP) and emerging markets.

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