Our guest blogger DV 34 makes a return with an expert look at the oil chart

Oil has been in the headlines recently, unfortunately for all of the wrong reasons…over the course of the last 2 years Oil has lost approximately 70% of its value causing a lot of problems worldwide

Personally I am quite bullish on Oil longer term and believe we may be at an inflection point

Listening to a technical analyst on Sunday who uses Gann based cycles (something I do not personally use) he noted a fundamental view that made sense to me and aligned with my long term technical view

The commentator noted that ‘newer’ oil drillers/ producers using fracking techniques and higher cost drilling rigs etc had a break even cost of around US$60/ barrel, whereas ‘older’ oil drillers and producers had much lower cost bases between US$10 - $30;

Oil is currently trading around US$29-$30

The authors point was to note that at some point, it becomes uneconomical to physically drill for oil and instead they would likely leave their oil in the ground and simply purchase contracts for delivery from the ‘older’ lower cost base drillers/ producers through the open market to satisfy their contractual supply obligations to refiners

This lead to a very interesting thought – If we are nearing the break even point of the older oil producers and the newer oil producers may be starting to buy from the older producers to satisfy contractual supply agreements (i.e. the industry is buying contracts from itself - near cost) then where is the path of least resistance?

In my view… it’s up… if the industry as a whole starts getting to breakeven levels of cost then eventually it erodes any motivation to supply as you are doing so at no margin or even worse at a loss! it simply does not make sense – and the scales could tip

Technically speaking I have had a bullish bias on Oil for a long time now mainly because we are now entering a large support zone going back 20 to 30 years as shown below

 

Crude Oil Monthly

 

Crude Oil Monthly Click to Enlarge Crude Oil Monthly
Click to Enlarge

There are a few zones to watch on Oil from a long term perspective

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. The 1985, 1990, 2000, 2003 highs/ resistance levels
  2. The 1st potential support zone is between $25-$32 that we are currently in
  3. The 2nd potential support zone is between $17-$21
  4. The 3rd potential support zone is between $10-$14, which would be getting down to extremely low levels and near costs levels for even the veteran companies in the industry
  5. This is supported by the oversold conditions and early signs of bullish divergence showing on the indicators

 

Crude Oil Montly Crude Oil Montly

At a closer view of the monthly chart there is a clear 5 wave structure down

If Oil were to rally from here using a simple fibonacci retracement we have 23.2% and 38.2% levels clustering with small structure levels which would offer some nice target zones

 

Crude Oil Weekly

 

Crude Oil Weekly Crude Oil Weekly

There is a clear AB=CD pattern here on the weekly and the low of last week hit the 1:1 level perfectly, My thoughts are that we may see a rally from here… possibly into a larger 3 wave move higher as noted with the ABC lines in red over the course of the next few months

Crude Oil Weekly Crude Oil Weekly

Thinking forward into a ‘what-if’ scenario, if Oil rallies from here there is also a possible Bearish Cypher pattern here as well around a gap close at $57.00 and would also be a retest of the long term trend line, so structurally it fits well together…

While it fits well theoretically, Mr Market may well have other ideas, but it's nice to see a combination of fundamentals and long term technicals agreeing on a view and having such clean alignment, which does not happen often on the macro charts

Saying this, it is just one possible scenario and nearly 100% above where Oil is now so a very long way off… but hopefully this explains my top down view on a very important market and also outlines some thought processes when considering long term counter-trend trades against popular beliefs at the time

To read what Cypher patterns are, read my explanation of them in an earlier CMC post here:,

Hope this helps and all the best

DV