Why Oil Prices Fell in the Face of "Supply Shock"

"Crude should be at the forefront of a..."

By Elliott Wave International

Looking back on 2022, one of the biggest fears about oil was that prices would skyrocket even more than they did due to a disruption in supply from Russia.

Of course, Russia has been a major world supplier of oil, but after Russia invaded Ukraine, many global financial institutions refused to back transactions involving Russian oil.

So, back in March of 2022, we had this headline from a major financial website (CNBC, March 4):

Oil market heads for 'biggest supply crisis in decades' with Russia's exports set to fall, IEA says

Conventional wisdom says that a disruption in supply, let alone the biggest in decades, would lead to soaring oil prices.

However, at the time that March headline published, NYMEX crude oil was trading around $115 a barrel -- and prices have been in a downtrend for most of the time since, for almost a year now.

In December, even the New York Times had a hard time explaining the disconnect (Dec. 9):

Oil Prices Drop, Despite Heightened Sanctions on Russian Crude

So, what's going on?

Well, Elliott Wave International has studied the historic price patterns of oil and has concluded that investors cannot count on a relationship between prices and the oil market's "fundamentals."

Indeed, Robert Prechter's Socionomic Theory of Finance provided historical analysis with this chart and commentary:

[The chart] shows the annual ratio between consumption and production worldwide. ... Take a look at the three shaded trends on the graph. The huge surge in the ratio between 1980 and 1982 -- the biggest rise on the chart -- did not cause the price of oil to rise; rather, it fell, a lot. Nor did the large decline in the ratio between 2002 and 2005 cause the price of oil to fall; rather, it rose, a lot. And the rapid plunge in the ratio during 2009 did not cause the price of oil to fall; rather, it tripled. These extreme anomalies render the proposed causality spurious.

What Elliott Wave International has observed is that oil's price does tend to follow Elliott wave patterns. As you probably know, Elliott waves reflect the repetitive patterns of investor psychology, the primary driver of financial markets.

Using the Elliott wave model, the December Global Market Perspective, a monthly Elliott Wave International publication which covers 50-plus financial markets, stated:

Crude should be at the forefront of a ... decline.

Indeed, as of this intraday writing on Jan. 9, NYMEX crude oil is trading lower than it was when the December Global Market Perspective published.

Now, the new January Global Market Perspective offers more insight into what you can expect for oil's future price path.

And, speaking of the Elliott wave model, if you're new to the subject, or simply need a refresher, read Frost & Prechter's Elliott Wave Principle: Key to Market Behavior. Here's a quote:

In markets, progress ultimately takes the form of five waves of a specific structure. Three of these waves, which are labeled 1, 3 and 5, actually effect the directional movement. They are separated by two countertrend interruptions, which are labeled 2 and 4. The two interruptions are apparently a requisite for overall directional movement to occur.

[R.N.] Elliott noted three consistent aspects of the five-wave form. They are: Wave 2 never moves beyond the start of wave 1; wave 3 is never the shortest wave; wave 4 never enters the price territory of wave 1.

... Elliott did not specifically say that there is only one overriding form, the "five-wave" pattern, but that is undeniably the case. At any time, the market may be identified as being somewhere in the basic five-wave pattern at the largest degree of trend. Because the five-wave pattern is the overriding form of market progress, all other patterns are subsumed by it.

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This article was syndicated by Elliott Wave International and was originally published under the headline Why Oil Prices Fell in the Face of "Supply Shock". 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.

Why the Threat of Deflation is Real

"The Federal Reserve is forging ahead with its balance sheet reduction"

By Elliott Wave International

I know -- inflation has been grabbing all the headlines for a good while now -- so you may wonder why the subject of deflation is relevant.

First, the definitions of inflation and deflation go beyond commonly accepted meanings.

As Robert Prechter's Last Chance to Conquer the Crash says:

Inflation is an increase in the total amount of money and credit, and deflation is a decrease in the total amount of money and credit. ...

The most common misunderstanding about inflation and deflation ... is the idea that inflation is rising prices and deflation is falling prices. General price changes, though, are simply effects.

That said, let's start off with an occurrence which is quite rare. Here's a chart and commentary from the December Elliott Wave Theorist, a monthly publication which covers major financial and cultural trends:

The chart, published by the Fed, shows that absolute M2 has been declining on a month-by-month basis for the first time in many decades, probably since the 1930s or 1940s. This trend is deflationary.

Keep in mind that M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers' checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds.

Another factor regarding deflation has to do with the Fed.

The November Global Forecast Service, an Elliott Wave International publication which analyzes 50-plus worldwide financial markets, showed this chart and noted:

The Federal Reserve is forging ahead with its balance sheet reduction, as the chart shows. This reduction in the central bank's assets which were paid for by money created out of thin air constitutes disinflation, and deflation (when the balance sheet is contracting on an annualized basis) will likely come by the end of the year.

So, now you see why deflation is very much on the radar screen of Elliott Wave International's Global Forecast Service, which can help you to prepare for what may be next.

Understanding the Elliott wave price patterns of global stock market indexes can also be of help in anticipating what's next for major economies around the globe.

You see, the economy tends to follow the stock market, in each country.

Getting back to the Wave Principle, here are some insights from Frost & Prechter's book, Elliott Wave Principle: Key to Market Behavior:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

Sometimes the market appears to reflect outside conditions and events, but at other times it is entirely detached from what most people assume are causal conditions. The reason is that the market has a law of its own. It is not propelled by the external causality to which one becomes accustomed in the everyday experiences of life. The path of prices is not a product of news. Nor is the market the cyclically rhythmic machine that some declare it to be. Its movement reflects a repetition of forms that is independent both of presumed causal events and of periodicity.

The market's progression unfolds in waves. Waves are patterns of directional movement.

Would you like to read the entire online version of this Wall Street classic -- for free?

You may do so once you become a member of Club EWI, the world's largest Elliott wave educational community.

A Club EWI membership is also free (no obligations whatsoever) and allows for complimentary access to a wealth of Elliott wave resources on investing and trading.

So, get started now by following this link: Elliott Wave Principle: Key to Market Behavior.

This article was syndicated by Elliott Wave International and was originally published under the headline Why the Threat of Deflation is Real. 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.