The first three and a half years of Donald J. Trump’s presidency proved active for the global oil complex. Featuring atypical market drivers—including a hot U.S.-China trade war, a fierce Saudi Arabia-Russia price war, and an unprecedented global pandemic—oil prices were all over the map. The only thing that didn’t factor into the dynamic was the most traditional energy market driver of all: military conflict.
From the fall of 2018 to the summer of 2020, West Texas Intermediate (WTI) futures traded in a historic range. October 2018 featured highs that eclipsed $75.00 per barrel. By April 2020, however, prices crashed to an all-time low of -$40.32 per barrel. As we move into late 2020 and beyond, traders may wonder whether WTI will revert back to 2018’s form or if the long-term crude oil bear market is here to stay.
Technically, a bear market is defined as being at least a 20 percent retracement of a security’s value from a periodic high. A widely accepted periodicity is two months or more, with the market experiencing consistent selling pressure throughout.
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On the other hand, economists and analysts differ on the exact definition of long-term. Financial traditionalists measure the long term in decades, and some consider the last 45 years to be the truest representation of long-term. Conversely, others assert that in the modern era long-term is best measured in one- or five-year increments.
For active crude oil futures traders, five years is an eternity. However, it’s useful for placing recent valuations into context. Given a five-year timeline, we are in the midst of a strong crude oil bear market. Here’s why:
Ultimately, oil prices opened December 2019 above $60.00, fueling reason for optimism. At the time, U.S. stocks were near record highs, 2020 global economic growth was expected to remain positive, and energy demand appeared relatively solid. However, the fundamentals of early 2020 confirmed the long-term crude oil bear market.
Any trades are educational examples only. They do not include commissions and fees.
In early 2020, the world’s oil markets faced the confluence of two extremely rare events: an oil price war and a pandemic. The result was an unprecedented drop in WTI crude futures—one that temporarily rendered a barrel of oil worthless.
Throughout the first half of 2020, plunge-and-recover was WTI’s theme. As in 2018, the price action of this period established that a long-term crude oil bear market was present:
Technically, the $41.20 price of WTI on July 1 2020 fell well short of the September 2018 to April 2020 62 percent% Fibonacci retracement of $53.56. This is an indication that the two-and-a-half-year bear market remained valid.
The analysis above focuses on a two-year period that represented a five-year trading range (2015-2020). In reality, the current crude oil bear market began in the spring of 2011, when WTI kicked off its long-term descent from highs above $130.00 per barrel. If you’re going to trade crude oil futures, then it pays to be able to recognize both long- and short-term trends.