Will Oil Strike Higher or Drill Lower?

The complexity of oil and its movements seen from an Elliot-wave point of view integrating fundamental analysis. Where do you

China surprised the markets Sunday night with its second cut to benchmark rates in three months. This should see oil and other commodities such as copper and iron ore trade higher as the cut in rates increases the demand on the energy industries, with investors believing that cheaper credit will stimulate demand.

Over the weekend Colombia’s finance minister said that the country was preparing for a “new normal” of between $60 to $70 per barrel. Yesterday the Mexican Economy Minister said that he expects oil prices to be between $50 and $60 per barrel next year. With oil prices falling to a five-and-a-half-year low in January the market attempted a rally before finishing last month only slightly higher than the January close at 49.76. So who be proved correct?

Even though crude rebounded in February to relieve some of the oversold technical we believe that oil can rally a little more in the coming weeks. Yesterday Saudi Arabia announced an increase in output by 130,000 bpd reaching its highest output level since September 2013. Yet oil, after an initial sell off of 2%, rebounded again off its lows, at one point reaching 2% up before closing the day higher.

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Oil Chart
Oil Chart Weekly SOURCE: Bloomberg Charts

With the market continuing to fail around the $54/$55 level we need to look for a 5-wave move higher to confirm that the correction is finally over. One of the hallmarks of a wave 3 is the obviousness of fundamentals. By this we mean that all the news out there is in the same direction and priced in. Crude supply and demand levels are discussed daily and according to the Energy Information Administration, US crude oil supplies are at 80-year highs. This has resulted in several of the companies involved in drilling and exploration reducing their investment into new wells. Also several companies have announced a delay in plans to complete wells that have already been drilled, in order to preserve cash.

Also another guideline of Elliott wave is that markets often bottom when all the news is bleak. So if we include yesterday’s sharp reversal we are looking for the next leg up in this wave-4 correction. Longer term however we are expecting a final push lower as supply from the middle east continues at pace for a move toward $25-$30 before a long-term bottom is in place, and the halt of all this oil exploration and lack of new wells coming online pushes us all the way back above $100. So at some point in the future there will be two very happy economy ministers in South America.

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