Don’t Count on an Immediate Big Bounce After Historic Fall in Oil Prices

Oil prices have fallen dramatically in the last few months. From the high close of $76.41 on October 3 through the close on Monday, December 24, West Texas Crude fell 44.34%.

There have all kinds of issues with oil. President Trump has been pressuring OPEC members not to cut output, the fiasco surrounding the murder of Jamal Keshoggi and possible/probable involvement of a Saudi prince, Venezuela’s ongoing issues… This entire article could be dedicated to the issues oil has faced in recent months and years.

Rather than focusing on all of those issues, I want to look forward based on what has happened in the past. I went back to the beginning of 1999 looking for similar periods where oil fell as sharply in a similar short period of time.

I found three time periods that I felt fit the scenario. The first one came after the World Trade Center attacks on September 11, 2001. From September 14, 2001 through November 15, 2001, oil fell 39.59% in 45 trading days.

If we look at the chart from back then, we see that oil bounced for a few days and then fell before settling in a range between $18 and $22 a barrel for several months. The price finally broke above the range in early March and then rallied for approximately seven months.

There were some sizable pullbacks during the seven-month rally and they were big enough to spook some traders out of long positions I am guessing.

The next period that I looked at was from September 22, 2008 through December 24, 2008. This is a period of 67 trading days and oil prices fell 67.68% over that time period. Of course, that was coming just a few months after oil had spiked to an all-time high of $147.27 per barrel. The drop in the fall took the price from around $109 per barrel to $35 a barrel.

After the fall, the next year looks similar to what we saw in the 2001-2002 time period. The price bounced a little and then fell again. Prices settled into a range between $35 and $50 a barrel for January and February and then broke out of the range in March. We see a similar rally seven-month rally from April through October and there were a few pullbacks along the way as well.

The final time period that I looked at was from October 29, 2014 through January 28, 2015. The price of oil fell 45.85% during this time period and that was over 62 trading days.

This time we see a totally different reaction than we saw after the other two big declines. The price did move into a range between $$42.50 and $52.50 for about a month and a half, it then rallied from mid-March through the beginning of May. The price traded in a tight range in May and June, but then started falling again.

If we consider the global economic environments of the three time periods, it might help us differentiate why the third reaction was different. The first time period we looked at was during the bear market in stocks and a slowdown in the economy. That economic slowdown ended toward the end of 2001. The bear market in stocks went on a little while longer, but U.S. GDP growth increased throughout 2002.

The second big decline came as oil prices were falling from all-time highs and in the midst of the financial crisis. The rally in oil prices coincides with the end of the bear market in stocks. From March 9, 2009 through March 9, 2010, the S&P rose 68.6%. During that same time period West Texas Crude rose 73.1%.

The third time period where oil prices were falling was not in a bear market, an economic slowdown, or a recession. In fact, U.S. GDP grew by 3.8% in the first quarter of 2015 and it started to taper off throughout 2015—only growing by 2% in the fourth quarter of 2015.

Looking at the three time periods, I would say that the one that is most similar to the current economic environment is the third one. We have seen the Chinese economy slowing and based on corporate earnings’ outlooks and other indicators, most analysts and economists are expecting the U.S. economy to slowdown in 2019. OPEC has lowered its demand forecast several times in recent months.

Based on the reactions after the three previous big declines, I can see oil rallying a little and then falling into a range for a few months. If the pattern holds true, oil will rally in the second quarter. If the economic forecasts are accurate and we do see a slowdown in 2019, oil may fall once again in the second half of the year—like it did in 2015.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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