Crude Oil: Why You Should Look Beyond Supply / Demand

The primary regulator of the rises and falls in oil’s prices is market psychology

by Bob Stokes
Updated: November 18, 2022

As I write on the morning of Friday, Nov. 18, crude oil is on track for its second weekly decline.

The financial media usually finds "reasons" for a market's price action that are rooted in "market fundamentals," and this decline in oil's price was no exception.

On Thurs., Nov. 17, a CNBC headline noted:

Oil falls on easing geopolitical tension, China demand outlook

The gist of the story was that a rising number of COVID-19 cases in China would contribute to a lower demand for crude oil in the world's second largest economy; hence, the falling prices.

However, Elliott Wave International has observed over the years that supply and demand doesn't play as large of a role in oil's price trend as widely believed. Indeed, all too often, oil's price moves in the opposite direction from what supply and demand observers expect.

That's why we would argue -- and this may seem like a radical notion -- that changes in the supply and demand for oil are far more a result of price fluctuations than a cause of them.

Let me explain. This chart and commentary from Robert Prechter's Socionomic Theory of Finance provides insight:

Elliott waves of social mood, as reflected in stock prices, regulate feelings of optimism and pessimism among producers, alternately motivating them to overproduce and then underproduce oil relative to contemporaneous consumption. Their optimism makes them believe business will expand, so they produce more; and their pessimism makes them believe business will contract, so they produce less. This depiction of causality accounts quite well for the rises and falls in oil's production/consumption ratio.

You may be interested in knowing that our crude oil analysis in our monthly Global Market Perspective is also based on Elliott waves of market psychology.

On Nov. 4, when our November Global Market Perspective published, our crude oil analyst said:

...at this juncture the intermediate-term outlook remains down.

On the date we made this forecast, WTI Crude Oil (NYMEX) closed at $91.45. As of this writing on the morning of Nov. 18, WTI Crude Oil is at $79.35 a barrel. Note that our Nov. 4 forecast didn't mention a single "geopolitical" or "fundamental" factor. We relied strictly on the bearish picture of market psychology in crude oil's price charts.

Do know that Elliott wave analysis does not always work out to a "T;" however, it's the best forecasting method for oil prices -- and other liquid markets -- of which Elliott Wave International knows. That's why we've relied on it for over 40 years.

Learn what Elliott wave analysis suggests is next for oil by following the link below.