Crude history repeats

Daily Energy Markets Analysis

Crude "Ultra-Bears" are shocked by oil's recent strength, but if you look at history they really should not be. While many traders last November would not have expected a drop price in oil, the bearish calls after the crash failed to take into account that falling oil prices have consequences. 

The old adage proves true, that low prices cure low and crashing prices, and at least in oil, it is always followed by a big time recovery. According to data provided by Price Asset Management, history would suggest that prices of oil usually come back quicker than most people think.

In fact, usually the bigger the break in petroleum percentage-wise the bigger the rebound in just 12 months. In 12 data points where oil had a break of 40% or more within a year the market rallied back 52.8% within 12+ months. Even when the break was only 30% with 20 times, the rebound was still a very impressive 45.5% within 12 months. I have used this data before when we calling oil's low at $44 a barrel, but I think it bears repeating as the market is acting as it historically has.

We know the reasons why oil prices are rebounding as the ultra-bearish arguments don't seem to hold water. The crash in prices set off a chain of events that changed the overwhelmingly bearish fundamentals into longer term bullish fundamentals. The first and perhaps most important fundamental was the historic rate that energy companies announced capital spending cuts. After you move cut back capital spending by more than 150 billion dollars or so in a couple of months, sooner or later you are talking real money. The oil crash has also crashed confidence in new investments, so even if oil prices rebound it is unlikely the industry will quickly bring back projects that will be needed after demand comes back. 

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About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.