by Nico Isaac
Updated: June 24, 2015
(Editor's note: USO and XLE are two of the most popular crude oil ETFs, designed to track price fluctuations in the market itself and oil-related stocks.)
The other day I received an email from a friend who's spending part of his summer in Azerbaijan. The subject of the email said: "Oil SPA-ll." Attached was a picture of him, covered in sticky black goo, smiling ear-to-ear in a bathtub filled with -- you never guessed it -- crude oil.
Apparently, it's a thing: "Petro Spas," where, due to its supposed medicinal properties, people soak in drums of Texas Tea.
My first thought? No. Thank. You.
But then, I realized something. Many investors in crude oil spend a good deal of time bathed in the black goo of confusion. Confusion, as it were, has no health benefits. And, in this case, it only gets worse the more one seeks help from the usual sources -- i.e. the mainstream financial experts.
Case in point: these two recent news items regarding crude oil offer conflicting insights into the market's supply backdrop:
-- Versus --
For you as an investor trying to stay in front of crude's near- and long-term price swings, this kind of after-the-fact "reporting" doesn't leave too many options. According to one top energy official, in fact, the best strategy is – take a guess, and hope for the best:
"The truth is, no one knows where oil prices are heading. We are approaching our business as if we may be in for a sustained period of lower prices... If the market improves, so be it -- all the better." (The Canadian Press)
Okay. We're gonna come clean here. (A little bath humor!). The truth is, it IS a huge challenge to know where oil prices are heading. We don't claim to know that for sure. You'll never be 100% certain. But there is a way to identify the most likely turning points in advance – by using Elliott wave analysis.
Take, for instance, the 55% sell-off in crude oil prices from June 2014 to March 2015. At a time when the fundamental experts called for "$200 a barrel" oil, our own May 2014 Elliott Wave Theorist spotted a "deadly" bearish combination of over-stretched sentiment and topping Elliott wave chart patterns:
"In oil futures, there is not only an all-time record long position among Large Speculators, but also an all-time record net short position among commercials, who have a history of being mostly on the right side of the markets they trade. Markets cannot stand such a high level of optimism among commodity investors (and pessimism among commodity users) for long. Whatever happens to oil prices in the coming weeks, the multi-year outlook is for much lower prices."
Then in July 2014, the latest edition of Bob Prechter's business best-seller Conquer the Crash included a special section on crude oil, excerpted here:
"In 2008, oil crashed by 78% in just five months. Under the Elliott wave model, that decline is wave a of an unfinished bear market...
"The long-term wave pattern supports this interpretation. Figure E-7 shows crude oil's bull market going back a hundred years. The structure is clearly five waves, within a parallel trend channel... Look carefully and you'll notice that the 2011 peak -- the one labeled wave b -- precisely touched the upper channel line. Wave c should carry the price of oil below the 2008 low."
In the July 2014 Conquer the Crash, our analysis anticipated oil prices going from $100 per barrel to "below the 2008 low" at $34.50. The ensuing sell-off came close, pushing crude prices to a 6-year low before rebounding in March 2015.