Crude oil has fallen to its lowest levels since December 2012. Now, both the technicals and the fundamentals are pointing to even lower oil prices ahead – and that could have some serious implications for stocks as well.
Richard Ross, global technical strategist at Auerbach Grayson, said a technical case can be made for oil to trade somewhere in the $70 range.
Ross' year-to-date chart for WTI crude shows a bearish distributive top formation until the selloff really began in August. Earlier this month, crude oil decisively traded below what he saw as a $91 support level. "That's going to be resistance on any bounce," he said. "The next stop is $80."
But it's a chart of crude going back to 2001 that has Ross worried. He sees a triangle or coil pattern in place since oil prices rebounded in 2009. The recent selloff broke below that triangle and that could mean lower prices still. Typically, when this happens,more selling occurs.
"You want to trade in the direction from the break from the pattern," said Ross, a "Talking Numbers" contributor. "In this case, the break is to the downside. You want to trade to the downside, and that's clearly what traders have been doing."
The fundamental picture looks equally bleak as a combination of a strong dollar, growing supply, and withering demand has traders hitting the sell button first and asking questions later.
"This is a confluence of really negative fundamentals," said Gina Sanchez, a CNBC contributor. "We're obviously in an oversupply situation and that doesn't seem to be getting any better," Sanchez added. "And global growth is being cut. That is never good for oil."
On top of that is price competition among OPEC nations, something not seen in a long time, said
Sanchez. While that could come at a painful price for those nations using oil revenues to fund social programs, she believes oil could still trade lower.
"Many OPEC countries that need oil prices to be high in order to maintain their fiscal budgets," Sanchez said. "I don't think that this could last for long. At some point, someone is going to wake up and cut production. However, I don't see how we can't break potentially even below $80, which would be terrible for a lot of countries."
What does that have to do with stocks?
Ross points out crude oil prices and equity prices have been trading together for a while. "Look at what crude oil did as equities were running to their peak in 2007 and then once again as they were plummeting during the financial crisis," he said. "Crude oil was trading in lockstep with equities. My point being if crude continues to move lower, it's clearly a potential dark cloud over the equity market."
"It's not so much about the fact that crude oil is coming down but why it's coming down," Ross added. "If those reasons are making you feel less confident about your job, about your house, about the economy, about your portfolio, then clearly that's not a good thing and that's going to override any of the gain you get from the little savings you get at the pump each week."
To see the full discussion on crude oil, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.