It seems that the bottom has fallen out of the energy market. Crude oil, specifically, is trading with a 20 handle for the first time since more than a decade. From the top in the summer of 2014 to today’s bottom, crude has lost 74%. That is the most aggressive decline ever in history.
When will crude oil will stop falling? We look for some clues in the following 3 charts. First, the crude oil price chart shows a secular support area between 30 and 40 USD per barrel. Right now, crude is testing the bottom of that area. Will that hold, or should be expect first a round of total capitulation? Based on the sell off so far, we believe capitulation is unfolding right now, so chances are high that the worst is over.
Second, optimism index has fallen to the lowest level in 3 decades. Only two occurrences were similar, i.e. the ones in 1998 and 2002.
Third, crude’s deviation from its 90 week moving average has only been once as large is it today, i.e. during the depths of the 2009 crash, as seen on the second pane of the next chart.
Based on those indicators and data points, our conclusion is that the worst is over when it comes to the decline in crude oil. As we are in a panic sell off, the decline can continue for a couple of days. But we believe there is at least a medium term bottom being formed here.