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Is Crude Oil in a Long-Term Bear Market? | StoneX

Written by StoneX | Mar 8, 2024 6:00:00 AM

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.

What Constitutes a Long-Term Crude Oil Bear Market?

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:

  • On 1 Sept. 1 2018, WTI crude traded at $74.79, just beneath the June 1 2018 value ($75.86); a five-year top. By Dec. 1 2018, prices had fallen to $46.59―a three-month decline of 37.7 percent. This price action met the requirements of a traditional bear market.
  • WTI prices rebounded in early 2019, rallying to $64.49 on April 1 of that year. The recovery generated a test of the 62 percent Fibonacci retracement level of the September-December 2018 crash, which stood at $64.07. Price failing to sustain trade above $64.00 confirmed that late 2018’s downtrend remained valid.
  • Throughout 2019, WTI traded below the 62 percent Fibonacci level ($64.07), reinforcing a long-term bearish view of the market.

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.

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2020: The Bearish Trend Continues

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:

  • From Jan. 1 2020 to April 1 2020, WTI prices fell from $51.51 to $18.93. This move represented a massive 63 percent plunge. Once again, the prolonged sell-off met the conventional requirements for a bear market.
  • From April 1 2020 to July 1 2020, prices rallied from $18.93 to $41.20, an epic topside move of 117 percent. The steep uptick brought hope to energy bears, but WTI still resided within long-term bearish territory.

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.

Identifying Trends Is a Critical Skill for Active Futures Traders

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.