Looking for a signal in oil
- Crude oil dropped more than 10% on Monday
- Similar moves followed by mixed short-term performance
- Geopolitical follow-through key to oil follow-through
On Monday the oil market got a reprieve from three weeks of negative headlines out of the Middle East. The response was immediate—and dramatic.
May WTI crude oil futures (CLK6) were trading above $101 in the Sunday-Monday overnight trading session—their second-highest level since the Iran war started at the beginning of the month. But after the White House announced it was postponing strikes on Iranian energy infrastructure, prices tumbled as much as 14% intraday before closing down a little more more than 10%:
Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)
Since 1986, spot crude oil prices have closed down at least 10% on 38 other occasions. Five trading days later oil was higher one more time than it was lower. Ony 15 of these 38 down days more closely resembled the current move—a one-day decline of at least 10% that also occurred within five trading days of the market’s highest close in at least two weeks. The most concrete conclusion one could draw about them is that oil prices continued to be volatile for the next few weeks:
•five trading days after the big one-day decline, oil prices were lower in 8 of 15 cases
•10 trading days after the big one-day decline, oil prices were higher in 8 of 15 cases
•20 trading days after the big one-day decline, oil prices were higher in 10 of 15 cases cases1
It’s not much of a stretch to argue that oil’s current path will depend on whether subsequent headlines confirm or contradict Monday’s news. If the market’s intraday volatility was any indication, there may still be some uncertainty that the US and Iran are truly on an “off ramp” that can lead to a sustained cooling of hostilities and normalization of energy prices.
But for an economy and a stock market concerned about the implications of higher-for-longer oil prices, Monday was a welcome development. Geopolitical follow-through will likely be key to follow-through moves in oil and the stock markets.
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1 All figures reflect spot WTI crude oil daily closing prices, 1986-2026. Supporting document available upon request.