The price of any commodity, crude oil included, is determined by the balance or imbalance between supply and demand. This year, there have been many things threatening the supply side of the equation. OPEC and Russia kept cutting production in an attempt to boost prices, which until recently seemed to be working. Not to mention the resiliency of the global economy, which, even in the face of high interest rates, kept the demand side quite steady.
Then there was the shocking terrorist act by Hamas on Israel and the resulting major war in the Middle East. As if the war in Ukraine and the reorientation of energy supplies away from Russia wasn’t disruptive enough. Yet, in less than two months, the price of WTI crude oil fell by 24% or nearly $23 a barrel. It climbed to $95 in late-September, only to barely hold above $72 in mid-November.
How do we explain this precipitous fall in the price of the most geopolitics-sensitive of commodities at a time of several major conflicts? Common sense doesn’t help much in this regard. It is precisely that it doesn’t make sense, which makes the crude oil collapse so baffling to so many. Fortunately, when looking at it from an Elliott Wave perspective, things start to make some sense. Take a look below.
The chart above was included in our October 16th Elliott Wave Pro analysis of crude oil. Hamas had attacked Israel just nine days earlier, so the fact that the price was rising wasn’t a surprise to anyone. Elliott Wave analysis, however, strongly suggested that the recent recovery, as logical as it might have been, was unlikely to last very long.
The bulls’ problem was that the preceding rally from $63.60 to $94.99 was best counted as a simple A-B-C zigzag correction. Wave B was an expanding triangle, marked a-b-c-d-e, followed by a big five-wave impulse in wave C, labeled 1-2-3-4-5. The five sub-waves of wave 3 of C were also visible. According to the theory, once a correction is over, the preceding trend resumes.
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Crude oil was clearly in a downtrend prior to the recovery to nearly $95 a barrel in late-September. This, and the sharpness of the following bearish reversal, led us to expect a lot more weakness going forward. The rally, which followed the start of the Hamas-Israel war, looked like nothing more than a minor wave 2 retracement. If the count above was correct, the downtrend was supposed to resume as soon as it was over. We all now what happened next, but let’s see it anyway.
$89.83 was the best the bulls managed to achieve in wave 2. Furthermore, the invalidation level at $94.99 was never in danger. Yesterday, exactly a month after our bearish October 16th analysis, the price of WTI crude oil fell to $72.22, before recovering to ~$76 a barrel as of this writing. From an Elliott Wave point of view, the sharp selloff not only makes sense, but was actually predictable weeks in advance.
It is to be expected that the price of a tradeable assets is going to react to news and events related to it. Of course, crude oil would jump when OPEC+ announces production cuts or when a war breaks out in the Middle East. But those reactions rarely hold any importance beyond the very short term. The bigger picture will always depend on macroeconomic factors influencing supply and demand. The problem is that those are equally unpredictable.
On the other hand, clear and fully-formed Elliott Wave patterns can often give us a hint of where things are going. The market is constantly absorbing and weighing all the important information far better than any person can ever hope to. All we have to do is recognize the patterns it has produced and left for us to see.
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