Oil prices have plunged over the last five months with the commodity dropping just under 32% from mid-June through last Friday. The selling has been so sharp the price has fallen in 14 of the last 16 weeks.
The weekly oscillators show just how oversold oil has become in the last five months with both the 10-week RSI and the slow stochastic readings deep into oversold territory. Oil went through similar selloffs in 2011 and 2012 when the price dropped 34% in five months and 30% in four months. In 2011, the oscillators never got anywhere near as oversold as they are currently and the stretch of weekly losses never came anywhere close to what we have seen in the last 16 weeks.
Despite the similarities between the percentage declines and the length of time which the declines occurred, there is something that isn’t similar and that is the sentiment.
In 2011 when the decline started, the Commitment of Traders report showed that large speculators were net long 260,000 contracts and toward the end of the selloff, the group was net long 130,000 contracts. The bullish sentiment had been cut in half by the end of the five-month drop.
Moving ahead to the decline in 2012, we see that large speculators were net long approximately 255,000 contracts when the selloff started and by the end of the decline the group was only long 110,000 contracts. In this case, the bullish sentiment was cut by 57% in four months.
Looking at the current Commitment of Traders report, we see that large speculators were net long 455,000 contracts back at the end of June and so far the lowest net long position that has been reached is 267,000 contracts. This drop in bullish sentiment represents a decline of 41%.
Based on the selloffs in 2011 and 2012, and how the sentiment changed in both of those instances, it looks like the selloff in oil may not be over yet. Of course that is if the pattern plays out the same way. Seeing the incredibly sharp decline and the relentless downward pressure on oil week after week, it is hard to believe that the large speculators haven’t made more of a shift away from the record bullish position established back in June.
The technical picture sure looks like the worst should be over as the 10-week RSI and the slow stochastic readings are the lowest they have been since the huge selloff in the second half of 2008 and that was when oil was coming out of the bullish run. But until the sentiment gets a little more bearish, there could still be some more selling toward oil.
