From "Peak Oil" to "Peak Glut"
by Steve Craig
Updated: April 22, 2020
Hi. Steve Craig here.
Remember Peak Oil? As crude ascended to its zenith in 2008, it was common to hear forecasts for prices spiraling ever-higher due to the potential for a supply shortage. Today, the focus has shifted 180-degrees. As the world shutters its doors to combat the spread of Covid-19, oil demand has cratered. No one, I mean absolutely no one... could have predicted Oil's unprecedented price decline to minus $40/Bbl on Monday, April 20th. To say it came as a "shock" is the understatement of the year. While we didn't predict sub-zero pricing on the NYMEX, the Wave Principle kept us bearish and on the right side of the market.
The fundamental rationale for the price collapse is simple. As oil demand withered, oil production did not. The excess oil was placed in storage and the excess storage capacity quickly maxed out. And, it maxed out to the point where there was essentially no excess storage available for unplanned deliveries on the May NYMEX futures contract which expired the next day.
If you been involved with futures for any length of time, the term "short squeeze" should be familiar. It's where short sellers are forced to pay up to liquidate or buy their short positions back prior to expiration in order to avoid the obligation to deliver. One of the more notable "short squeezes" came on the heels of Hurricane Harvey in 2017. 30+% of the countries refining capacity was forced off-line due to extensive flooding along the Gulf Coast and Unleaded prices just skyrocketed. The opposite of a "short-squeeze" is a "long squeeze" and that's what we witnessed on Monday. The oil longs had to drop their price into negative territory to find willing purchasers.
Again, while we couldn't foresee negative prices, the next best thing was to maintain a bearish stance.
Here's the chart we showed subscribers and referenced in the March 19th ETV video. It implied that the market was in the final leg of a five-wave decline -- an impulse wave -- from the Intermediate wave (2) peak with even more downside potential to finish wave 5 and complete the Intermediate wave (3) decline. From the low on March 18th -- the date of the chart, the market entered a period of sideways consolidation.
The week-long correction took shape as a triangle -- a core Elliott wave corrective pattern and on Thursday, March 26th we were looking for evidence to suggest that it was complete and told subscribers that "Trade below the May contract's 20.80 low should open the door to the downside".
It did and on Monday, March 30th the market registered a new low for the move at 19.27 and the hunt was on for the Intermediate wave (3) low. At the time I said that a rally past 20.86 would offer an aggressive hint that the wave (3) low was in place and that proved to be the case.
The market extended the advance from 19.27 up to 29.13 and then turned down to post an even lower low for the move -- one we anticipated for subscribers by applying the Wave Principle. Going forward, the market's steep contango should provide traders with numerous opportunities as the bear market grinds on.
Now to be clear, not every forecast works out as well as these did. No form of analysis -- technical or fundamental -- can guarantee success. Still, actively traded markets like Crude repeat the wave patterns identified by R.N. Elliott over 80 years ago again and again and at multiple degrees of trend. The beauty of Elliott wave analysis is that it gives practitioners a means to spot high confidence trade set-ups whether your time horizon is hour-to-hour, day-to-day or week-to-week. More importantly, however, the risk associated with each trade set-up is easily defined and proper risk management is a key element of long-term trading success.
As always, we'll take it one wave at a time. Take care and stay safe!
Crude Oil Was Already a Very Active Market.
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