This week, after falling since the end of April, oil futures officially entered bear market territory. That happened on Wednesday, with an unexpected build in inventories sparking the latest drop in crude. Despite that build though, the market bounced back yesterday. That raises the question, is this bounce sustainable?
There are essentially two ways of analyzing any market, technical and fundamental, and in this case, both give the same answer…no.
From a technical perspective, if we track this move down from the May 20th high of 63.96, this small move up looks like the fourth wave in a classic, five-wave Elliott pattern. That would mean that there is another, bigger downward leg to come that would take crude to the mid-forties.
Of course, technical analysis should always be done with the awareness that fundamental conditions will supersede any signal it gives, but the fundamental outlook now isn’t any more encouraging. The trade war continues to escalate and, while the U.S. stock market can remain relatively strong, that escalation will continue to put pressure on the more globally focused oil market.
Encouraged by continued growth and no major drop off in economic data, President Trump has escalated the use of tariffs as a way of putting pressure on other countries to change their behavior. He sees them as a useful weapon and, most importantly, one without political cost. If anything, his base likes the idea of punishing other…