Commodities Corner: For oil, it is a bad news bear market

Oil is getting mauled. A fresh plunge in prices for West Texas Intermediate has given way to a bona fide bear market this week, and some analysts don’t think the battered commodity will be quick to rebound.

Crude-oil futures CLU5, -0.83%  settled Thursday at $ 48.45 a barrel on the New York Mercantile Exchange, their lowest settlement since March 31. Based on that, prices were down more than 20% from their $ 61.43 settlement high in June—meeting the criteria for a “bear market.”

Prices fell further on Friday, set for a weekly loss of more than 5%.

“The simple story is high production levels around the globe,” said John Macaluso, an analyst at Tyche Capital Advisors. “We are in uncharted territories with inventories building at this time of year.”

Why has oil entered bear territory?

U.S. oil prices sank into a bear market this week amid a global glut of crude and the market isn’t betting on a speedy rebound. Sarah Kent reports. Photo: AP

“Anemic changes in U.S. production have proved that companies have more sustainability than many imagined at these low prices,” he said.

Production in the contiguous 48 states for the week ended July 17 was unchanged from the week before. It’s just about one million barrels above the year-ago level, government data show.

Ken Crawford, portfolio manager at Argent Capital Management, citing comments from his colleague Kirk McDonald, said that exploration and production companies at a conference this week in Denver talked about how they had lowered finding and development costs, in part due to success in nontraditional drilling techniques, such as hydraulic fracturing and horizontal drilling.

Following the conference, McDonald said that he believes those so-called E&Ps were more likely to grow from here, rather than shrink.

“This puts further pressure on the market,” said Crawford. “If North American E&Ps are getting back into production growth, that means supply estimates have to rise.”

And that “certainly makes it more difficult for the price to climb from here,” he said.

There is also the prospect of more oil on the world market coming from Iran, following the nuclear deal with the West.

“While Iran’s oil may take time to come to market, the addition of Iranian crude cannot help and oversupplied market,” said Crawford.

Macaluso, as well said that any rally in crude should be “sold into barring any major supply disruptions that could provide fear premium into the market.”

But not everyone is so pessimistic.

Based on a technical analysis, Darin Newsom, DTN senior analyst, said the long-term trend for Nymex crude is up. The continuing selloff in oil is nothing more than a “Wave 2” retracement of an “Elliott Wave 5-Wave uptrend.”

The Elliott Wave principle is a forecasting methodology used by technical analysts, which is based on the belief that financial markets trend in five waves, and retrace in three waves. Read: A great explanation of Elliot Waves

Wave 1 was the rally from $ 42.03 in March of this year, though the high of $ 62.58 in May, he said. Wave 2, meanwhile, tends to be “a long, grinding slide lower.”

Wave 3 will likely begin when the investment side starts adding longs again, possibly due to the U.S. dollar index coming down, Newsom said. And “we’ll know we are in a Wave 3 when the market gets back above its Wave 1 high” of $ 62.58.

Wave 4 will be another corrective down move that won’t likely last as long as Wave 2, and Wave 5 is the “final leg up” when prices usually see “high volatility as the market sets its high for a while,” Newsom said.

But after that 5-Wave cycle is done, it is usually followed by a 3-Wave downtrend, said Newsom.

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