Crude Oil Couldn’t Care Less About “Fundamentals”

By Elliott Wave International

If there’s one financial market that investors evaluate based on “market fundamentals,” it’s crude oil.

This Feb. 10 Reuters news item provides an example:

Oil may resume its rally in 2023 as Chinese demand recovers after COVID curbs were scrapped and lack of investment limits growth in supply, OPEC country officials told Reuters, with a growing number seeing a possible return to $100 a barrel.

Of course, whether the price of crude oil rises to $100 this year remains to be seen. The point is to show you a typical forecast based on “fundamentals.”

Yet, over the decades, there have been scores of crude oil forecasts based on “fundamentals” which have simply not panned out. Indeed, quite a few times, prices will move in the opposite direction from the consensus of the “fundamentalists.”

However, Elliott Wave International has observed that crude oil tends to follow Elliott wave patterns of investor psychology.

Let’s look at a historical example. Back in 2008, crude hit an all-time high of almost $150 a barrel. Predictably, the mainstream saw more upside; calls for $200 a barrel were common. But here’s a chart from our June 2008 Global Market Perspective with the “5” wave label (indicating an Elliott wave end to oil’s rise). The commentary from that issue is below the chart:

The fifth wave has carried to the upper line, which signals that the rally is nearing an end. Oftentimes, prices will “throw over” the upper channel for a brief period.

As you can see at the bottom of the chart, the Daily Sentiment Index (courtesy revealed that 90% of traders were expecting oil’s price to keep rising. Many energy observers were citing “fundamentals” as the reason why. Meanwhile, both Elliott waves and sentiment agreed: A major top was near.

Indeed, a dramatic “throw over” did occur as crude oil topped a little more than month later. Prices then plummeted 78% in just 5 months, as this chart shows:

Mind you, no analytical method can offer a guarantee about a financial market, and that includes the Elliott wave method.

That said, Elliott wave patterns are far preferrable to “fundamentals” as a way of anticipating crude oil’s turns and trends.

If you’d like to learn how the Elliott wave method can help you in your analysis of financial markets, read Elliott Wave Principle: Key to Market Behavior — the Wall Street classic by Frost & Prechter. Here’s a quote from the book:

Although it is the best forecasting tool in existence, the Wave Principle is not primarily a forecasting tool; it is a detailed description of how markets behave. Nevertheless, that description does impart an immense amount of knowledge about the market’s position within the behavioral continuum and therefore about its probable ensuing path. The primary value of the Wave Principle is that it provides a context for market analysis. This context provides both a basis for disciplined thinking and a perspective on the market’s general position and outlook. At times, its accuracy in identifying, and even anticipating, changes in direction is almost unbelievable.

If you’d like to read the entire online version of the book, you may do so for free once you join Club EWI, the world’s largest Elliott wave educational community. A Club EWI membership costs nothing, yet members enjoy complimentary access to a wealth of Elliott wave resources on investing and trading without any obligation.

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This article was syndicated by Elliott Wave International and was originally published under the headline Crude Oil Couldn’t Care Less About “Fundamentals”. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.