A New Case For $100 Crude

From the middle of June until the end of last month, crude was in a sustained downward trend that saw WTI futures drop 38% from a June 14^th high of 123.68 to a September 26^th low of 76.25. That move was not in a straight line, of course, and contained at least half a dozen retracements that looked promising at times, but ultimately turned out to be bear market rallies, consolidation-type moves that set up for more selling quite quickly. I have stayed bearish during that time, but over the last few days, my long-term base case has shifted.

When CL started to bounce off that September low, most were suspicious, given how many false dawns we had already witnessed.  Now, however, a month after that low was hit, this is starting to look like a sustainable rally, both on the chart and in terms of the fundamentals.

From a chart perspective, this looks more like a reversal than just another retracement. After climbing off the low, CL did retrace a little, but over the last few days has bounced back again. That would indicate that an actual low has been formed and if we continue higher and break above 93.64, we will be in the third wave of a bullish Elliott pattern. There is still some way to go to get there, but it looks more likely now than a drop back to $76, not least because the economic outlook had changed.

The change is actually quite subtle, but it improves the outlook for oil demand considerably.

As Q3 earnings have come in, a pattern is emerging. Most of the bad earnings reports, with top and bottom-line misses and lowered guidance, have come in the areas of tech, and business-to-business companies. The disastrous META earnings this morning would be a case in point. Meanwhile, consumer-oriented and manufacturing businesses have actually faired quite well. Companies like Coca-Cola (KO) and GM (GM) did relatively well in Q3 and in many cases have actually raised their Q4 outlooks. That indicates that businesses have been cutting back in anticipation of a recession, but that recession hasn't really come because consumers are still spending.

That is a good sign for oil, demand for which is far more sensitive to consumer activity than it is to software or online ad sales, but it also increases the chances of a "soft landing" for at least the US, and maybe even for the global economy. US GDP rose 2.6% last quarter after two consecutive quarters of declines. That might be seen as increasing the risk of even more drastic tightening by the Fed, but there have also been recent signs that price increases are moderating. That would increase the chances of them easing up a bit and maybe pausing hikes until the impact of the hikes so far is known. Over the last week or so, the bond market has begun to see that as a distinct possibility, with yields coming off their highs and the inverted yield curve flattening out somewhat.

So, it is possible, likely even according to the data, that the economy will not crash before the Fed stops squeezing, and that there will be only a quite small slowdown with what weakness there is concentrated in areas of the economy that are not important in terms of oil demand. Given that the drop has really been about demand, that is a huge change in fundamental conditions, which is why, over the last few days, I have swung from bear to bull.

So, if we go back to the chart, where would we be headed in a bull market? The first target would be a break above the October 10^th high of $93.64. As I said that would confirm this move up as the third wave in an Elliott pattern and if that happens, then Elliott theory says we would go up above $100 before retracing again in wave four, then push back up above the third wave high in wave five. All of that looks far more likely now than it did just a few days ago, so I for one will be trading with a long-term long bias until things change again.