Oil Prices Vs. Production: See the "Elephant" Almost Everyone Ignores

If production drives prices, how does oil rise 14x when production trends sideways for 10 years?

By Elliott Wave International

There's a widespread assumption that supply and demand drive oil prices. Almost all economists base their oil forecasts entirely on this premise, and so do many speculators.
If the oil industry ramps up production and increases supply, economists expect a drop in oil prices. If production decreases, or some other factors hint at supply constraints, they anticipate a rise in oil's price.
A case in point is this March 23 CNBC headline:

Trump security pick John Bolton likely to turn up heat on Iran and boost oil prices

As you may know, Bolton is considered to be "hawkish" toward Iran, so the thinking goes that a ramping up of U.S. sanctions against the nation could hamper Iranian oil production or Iran's ability to sell oil on the open market.
It may very well turn out that oil prices do move higher, but, according to our research, production is not everything.
Consider this graph and commentary from EWI founder Robert Prechter's 2017 book, The Socionomic Theory of Finance:

Supply-demand theorists glance at this graph and declare that the trend toward more U.S. oil production caused oil's price to fall. But the claim does not bear scrutiny. How does one get a 14-times rise in the price of oil out of the perfectly sideways production trend from 1998 to 2008? It seems a bit extreme. Oil prices then crashed before the volume of production emerged from its historical range, an event that doesn't fit the mechanics paradigm. Finally, it is outright impossible to account for the fact that oil prices tripled as production surged from December 2008 to May 2011 and held up for three years thereafter as production continued to expand. This history of behavior mercilessly mocks the ubiquitous assumption that changes in the supply of oil determine changes in its price. Yet no one seems to notice.

Rather than a change in supply dictating a change in price, the chart shows one thing unequivocally: that a change in price ultimately encouraged the discovery of a new source of supply. The huge, 14-times rise in the price of oil from 1998 to 2008 prompted U.S. oil producers to step up exploration, which ultimately led to new production.

So, if you're an oil trader, basing your trading decisions on the traditional supply-demand model may do great damage to your portfolio. Supply and demand factors do play a role in price formation, but they are far from being the only factors.
The trend in collective psychology of speculators, reflected by Elliott wave price patterns on oil's price chart, govern oil prices to a much higher degree.
Indeed, the fact is that the Elliott wave model helped EWI call "every major turn in crude oil since 1993." It's a verifiable claim.
Now is the time to learn more about this essential forecasting tool, so you can stay ahead of the oil market trend -- as well as those in other major financial markets.

Even the Surprise Disruption in Oil Supply by Hurricane Katrina Failed to Make Crude Prices Soar!

Plus, how does an oil market observer explain "why the price of oil zoomed 1,300% in ten years, crashed over 78% in five months, tripled in 2 1/2 years and then plunged 75%"
EWI's research reveals that a major shift in supply and / or demand did not either precede or happen at the same time as any of these big changes in oil prices.
So, what does govern the trend of oil prices?
In this compelling video from EWI founder Robert Prechter, you'll learn how a team of oil market analysts anticipated every major price move since 1993 -- including crude's 75% crash in 2014-2015.
Watch Now: The Forecasting Tool That Called Every Major Turn in Crude Oil Since 1993.

This article was syndicated by Elliott Wave International and was originally published under the headline Oil Prices Vs. Production: See the "Elephant" Almost Everyone Ignores. 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.

Watch This Group Signal Stock Market Trend Changes

Virtually all stock market forecasting is based on the fallacy of linear extrapolation

By Elliott Wave International

Many investors would welcome a "secret insight" about the stock market that someone whispers in their ear.
But you can get "tipped off" on when a financial trend is about to change from a very public source that many investors may overlook.
That source is none other than the U.S. government.
Robert Prechter's 2017 book, The Socionomic Theory of Finance, explains why:

State institutions generally wait for a strong consensus to become motivated on an issue... Members of Congress, expressing the same extremes in social mood that speculators do, have passed lenient financial legislation near stock market tops and restrictive legislation near bottoms.

So, you can get a big clue about a stock market trend change by keeping tabs on major financial legislation. By the time a strong consensus develops, the stock market trend is about over.
This chart from the book shows you the record:

Near the market top of the 1920s, the government allowed commercial banks to issue securities. But after the end of the severe bear market that followed, a law was passed that separated commercial and investment banking.
Indeed, during the decades that followed, government actions continued to lag the stock market's behavior.
The Insider Trading and Securities Fraud Enforcement Act followed the 1987 crash. Then, after the long 1990s bull market, the Financial Services Modernization Act of 1999 once again combined commericial and investment banking. Just two months later, the stock market topped.
In 2010, after the 2007-2009 decline, the Dodd-Frank Wall Street Reform and Consumer Protection Act passed. In a phrase, the law's purpose was to "reign in the reckless Wall Street behavior."
But, that was then.
Today, it's more like, "what reckless Wall Street behavior?" In other words, the stock market has been climbing higher for nine years. Who needs Dodd-Frank?
Indeed, here's what the Washington Post reported on March 6, 2018:

Senate advances plan to weaken Dodd-Frank banking rules...

If passed, the measure would mark the most significant revision of banking rules since Congress passed a sweeping financial regulatory law in response to the 2008 economic crisis.

Keeping in mind that the government is the last to embrace a trend, does this mean a bear market is upon us?
If you are prepared to take the next step in educating yourself about the basics of the Wave Principle -- access the FREE Online Tutorial from Elliott Wave International.
The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like!
Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever.

This article was syndicated by Elliott Wave International and was originally published under the headline Watch This Group Signal Stock Market Trend Changes. 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.

This "Illusion" Can Destroy Once-Vibrant Portfolios

Virtually all stock market forecasting is based on the fallacy of linear extrapolation

By Elliott Wave International

Those who've invested solely in the stock market during the past several years have seen the value of their portfolios increase.
As of June 30, 2017, the average 401(k) balance stood at $97,700, according to Fortune magazine. That was a 9.6% increase from a year earlier. Average IRA balances were even higher at $100,200.
This is all well and good.
But, here's a sample of the type of thinking that, ironically, could very well sink many a stock portfolio:

• 'This bull market is only halfway through' -- CNBC, March 12, 2018
• [Market Veteran]: Why Stocks Will Keep On Cooking -- Barron's March 8, 2018
• Bull markets don't die of old age... this one has more room to go, says market watcher -- CNBC, March 7, 2018

This belief in the continuation of the trend is noteworthy, given the fact that the bull market has lasted for nine years, and no bull market in history has lasted longer than 10. Yet, at the same time, those headlines are not at all surprising.
Why not? Well, it boils down to two words: linear forecasting.
On March 7, 2018, EWI founder Robert Prechter elaborated:

Humans possess an ever-present, unconscious illusion that whatever trends and conditions currently in existence will persist. That illusion is the basis of all linear forecasting, which is to say virtually all forecasting. Elliotticians are different. We anticipate change.

The way "we anticipate change" in social actions, including the stock market, is via the Elliott wave model.
A recent example is from our February 2018 Elliott Wave Financial Forecast. As you read the excerpt from the publication, keep in mind that a "throw-over" is a penetration of a trendline, which is confirmed by an immediate reversal back across that line:

Students of Elliott Wave Principle by Frost and Prechter will recall this observation anticipating what could happen at the end of Supercycle wave (V): "If there is a throw-over, the ensuing reaction could be breathtakingly fast." Neither the experts nor the investing public is making any allowance for this potential.

Keep in mind that this statement was made as of the close on February 1. As you can tell on the chart below [wave labels available to subscribers], which is from our March 2018 Financial Forecast, the Dow Jones Industrial Average plunged 11% over the next six trading days. The "throw-over" had indeed been confirmed.

Now is the time to find out what our Elliott wave experts are anticipating next for the stock market.
If you are prepared to take the next step in educating yourself about the basics of the Wave Principle -- access the FREE Online Tutorial from Elliott Wave International.
The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like!
Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever.

This article was syndicated by Elliott Wave International and was originally published under the headline This "Illusion" Can Destroy Once-Vibrant Portfolios. 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.

"The Last Great Myth of Every Financial Euphoria"

See how financial markets are governed by waves of optimism and pessimism -- not cold reason

By Elliott Wave International

Beware of the "New Normal" in the Stock Market!

The January 2018 Elliott Wave Financial Forecast put it this way:

After two decades of Mania Era asset bubbles and sentiment extremes, what now seems normal to many investors is actually highly abnormal.

That's right -- many investors no longer fear asset bubbles. That is why too many will be caught off-guard when the Mania Era inevitably ends.
Many investors are not frightened by the phrases "stock market bubble," "housing bubble" or any other type of financial bubble.
Because, by the time the talk of a bubble makes it into the news cycle, investors perceive the long rise in asset prices as the norm and "today" as "different."
A classic Elliott Wave Theorist made the point this way:

It's never irrational exuberance in the present, only in retrospect or in the future. To quote the White Queen, "The rule is: jam tomorrow and jam yesterday--but never jam today."

For example, even as the bull market in stocks celebrates its 9th birthday, read these headlines:

• There Is No Bubble: Why Stock Bears Continue To Cry Danger -- Seeking Alpha, Feb. 7, 2018
• There's no reason to run from the stock market -- CBS Moneywatch, Feb. 7, 2018
• Stock market fall looks like a correction, not a crash -- The Guardian, Feb. 6, 2018

Also think back to 2005, when housing prices were soaring and house flipping was the rage. In November of that year, the Elliott Wave Financial Forecast mentioned another fatal assumption about bubbles:

After Manhattan real estate prices collapsed 12% in the third quarter [of 2007], the NY Post asked "Could it be the bursting of the real estate bubble? Not exactly. There are no indicators that this is the beginning of a crash. Think of the current kinder, gentler bubble, not a catastrophic burst, but a reality check, a skimming of the froth, a round of requisite price corrections that is seen as a welcome necessity." This is the last great myth of every financial euphoria; that the excess can be slowly "unwound." It is exactly what was said about technology stocks in May and June of 2000.

Around the same time, this headline reflected the sentiment of then Fed chairman Ben Bernanke (Washington Post, October 2005):

There's No Housing Bubble to Go Bust

Less than a year later, housing prices peaked in June 2006. But there was no "slow unwinding."
Instead, home foreclosures skyrocketed through 2010. Some markets, like Las Vegas, saw housing prices plummet more than 60%.
Or, think back to technology stocks in 2000 -- no slow unwinding there, either. This chart is a reminder:

Instead of a methodical and rational unwinding, the technology-heavy NASDAQ crashed 78%.
Here's a more recent example of a bubble bursting: the October 2007 DJIA top followed by a 54% crash:

Financial markets are driven by emotion --optimism and fear -- not by cold reason.
So, it's a myth that financial bubbles are "rationally" unwound or deflate slowly.
Is Your Portfolio Built on False Assumptions?
Download this Free 33-Page Report to Find Out.
Did you know that the vast majority of portfolios are built on false assumptions? These false assumptions -- or Market Myths -- have been passed down across generations. They are so baked into investor psyche that no one ever thinks to challenge them... but we do. Do earnings really drive stock prices? Can the FDIC actually protect you? Is portfolio diversification a smart move? Download Market Myths Exposed now and find out whether your portfolio is built on flawed foundations. We guarantee you'll be shocked to find the truth.
Sign up now and get FREE access to The Market Myths Exposed eBook.

This article was syndicated by Elliott Wave International and was originally published under the headline "The Last Great Myth of Every Financial Euphoria". 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.

When One Pattern Ends, Another Begins

Learn what really governs the trend of interest rates

By Elliott Wave International

By Monday, Feb. 26, the stock market rally that carried major indexes out of the depths of the recent sell-off came to within 1000 points or so of the DJIA's Jan. 26 all-time high of 26,616.
The next day, on Feb. 27, a major financial publication published this headline (Forbes):

U.S. Stock Market Surge - 'The Bull Market Is Back'

Throughout the rally, many other observers expressed the view that the uptrend was back on track.
In stark contrast, after the close on Feb. 26, with the DJIA near 25,700, our Short Term Update showed subscribers this chart and said:

The DJIA gapped higher at today's open for the third straight day, carrying to 25,690.60 intraday. The index has carried into resistance at 25,520-25,920 (2763-2800 in the S&P) and the subwaves of the rise appear complete or nearly so.

As you know, the very next day, the DJIA closed down nearly 300 points, and since then, the volatility to the downside has persisted. (As I am writing this on Thursday, March 1, a CNBC headline says, "Dow plunges as much as 586 points...")
Not all Elliott wave forecasts work out like this. Still, what you gain from looking at the market through the Elliott wave prism is a roadmap of sorts. When you can count one price pattern as complete, you know what pattern should come next. That's how on February 26, our Short Term Update editor knew that the rally off the recent lows was on its last leg. Next, the wave pattern called for a reversal.
This is quite in contrast with many other market opinions you hear. A Feb. 26 Wall Street Journal article described it this way:

How Do Pundits Never Get It Wrong? Call a 40% Chance

Talking heads have learned that forecast covers all outcomes ...

Say there is a 40% chance of a market going up or down, and you'll be "right" either way.
The Elliott wave model employs strict rules and guidelines. And at this market juncture, the implications of what it's revealing are huge.
If you are prepared to take the next step in educating yourself about the basics of the Wave Principle -- access the FREE Online Tutorial from Elliott Wave International.
The Elliott Wave Basic Tutorial is a 10-lesson comprehensive online course with the same content you'd receive in a formal training class -- but you can learn at your own pace and review the material as many times as you like!
Get 10 FREE Lessons on The Elliott Wave Principle that Will Change the Way You Invest Forever.

This article was syndicated by Elliott Wave International and was originally published under the headline When One Pattern Ends, Another Begins. 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.

Should You "Fret" Over the New Fed Chair's Possible Actions?

Learn what really governs the trend of interest rates

By Elliott Wave International

Is new Fed Chair Jerome Powell a hawk -- meaning, will he aggressively raise rates to curb inflation?
That's what investors are asking as Powell makes his first appearance before Congress in his new role. The belief that Powell will be hawkish has already rattled markets, according to some observers (Reuters, Feb. 23):

Markets fret over Federal Reserve's approach under new chair Powell

Investors are starting to doubt whether they can count on the protective embrace of an accommodative U.S. central bank when markets go haywire.

Of course, "accommodative" means leaving interest rates low, or raising them slowly and a little at a time. This is "accommodative" to the stock market because low rates are supposed to motivate investors to seek higher returns in the stock market. On the other hand, higher rates would provide competition for stocks.
Here's something to keep in mind, before we go on: EWI's studies show no consistent relationship between the trend in rates and the stock market. Even so, this belief remains widespread.
Getting back to whether Powell will be aggressive with raising rates, our research posits that wondering about the new Fed chair's possible future actions is based on a false premise.
You see, the evidence shows that the Fed does not act; it reacts. It reacts to the bond market. In other words, the bond market leads the way on rates, not the Fed.
Robert Prechter's 2017 book, The Socionomic Theory of Finance, provides a historical example when it showed this chart and said:

No one monitoring the Fed's decisions can predict when T-bill rates will change, but anyone monitoring the T-bill rate can predict with fair accuracy when the Fed will change its funds rate. The Elliott Wave Financial Forecast demonstrated this ability in September 2007 by predicting that the Fed was about to lower its federal funds rate dramatically.

The aftermath is shown in this chart:

As you can see, the Fed's benchmark rate followed the T-bills rate lower.

This pattern maintained even during the dramatic period of double-digit rates in the late 1970s and early 1980s.... T-bill rates peaked four times in 1980-1982. Each of those peaks occurred a month or more before subsequent and reactive peaks in the federal funds rate. The Fed's rate also lags at bottoms, [such as] the lows of 1980, 1981 and 1982-3.

So, regarding interest rates, it's best to monitor the bond market, not the Fed.
Financial markets are governed by investory psychology, which expresses itself in repetitive price patterns at all degrees of trend. We call them Elliott wave patterns.
Following these patterns in the bond markets -- something us here at EWI do regularly and share our findings with subscribers -- can help you anticipate what's next for interest rates.
Is Your Portfolio Built on False Assumptions?
Download this Free 33-Page Report to Find Out.
Did you know that the vast majority of portfolios are built on false assumptions? These false assumptions -- or Market Myths -- have been passed down across generations. They are so baked into investor psyche that no one ever thinks to challenge them... but we do. Do earnings really drive stock prices? Can the FDIC actually protect you? Is portfolio diversification a smart move? Download Market Myths Exposed now and find out whether your portfolio is built on flawed foundations. We guarantee you'll be shocked to find the truth.
Sign up now and get FREE access to The Market Myths Exposed eBook.

This article was syndicated by Elliott Wave International and was originally published under the headline Should You "Fret" Over the New Fed Chair's Possible Actions?. 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.