The end is nigh. The recent dramatic slide in oil prices is now close to running its course, and a rebound is likely in the coming days and weeks.
For three years, from 2011 to last year, oil resisted deflationary pressure in almost every other commodity, ranging through metals, minerals and agriculture.
Last May, this column drew attention to the extreme low volatility that oil had been experiencing and suggested a strong directional move was likely in the following weeks.
WTI crude and Brent crude had been in a tight range between US$85 and $115 since early 2011, and an intense period of high volatility with a strong downtrend duly materialised in the second half of last year.
It began with a price breakout from the three-year-long consolidation period last August. A sharp sell-off has subsequently pulled prices to $48 levels over the past five months, with each month closing lower than the previous.
The move has been driven by the supply/demand shift, but the strengthening US dollar is also negatively affecting commodities, including oil.
Historically a strong dollar has been deflationary, and during a deflationary period commodity prices decline.
The magnitude of the sell-off has been similar to that experienced in 2008, when global financial markets collapsed. But despite the negative sentiment now circulating in the energy markets, the outlook for oil may be about to change.
$40 is a multi-decade support level for light crude, and breakdown below this would be extremely negative in the long term. However, we should expect the price to now bounce – the main question is how strong this rebound will be. The strength of buying activity in the coming weeks should be watched closely.
Aksel Kibar is a technical strategist at the Abu Dhabi-based asset manager Invest AD
Follow The National's Business section on Twitter
