Oil Price Analysis: Bear Flag Signals Breakdown and Recession
On January 18th, 2025, crude oil prices surpassed the $80 per barrel mark, continuing a period of relatively strong trading. However, this upward momentum proved short-lived. Over the subsequent six weeks, oil experienced a significant correction, plummeting to a low of $66 per barrel. A modest recovery has occurred over the past three weeks, with prices stabilizing around $69 per barrel.
This recent price action has formed a textbook bear flag pattern on the charts. In technical analysis, a bear flag is a bearish continuation pattern that typically follows a sharp decline. The brief upward consolidation, represented by the flag, often precedes another significant move lower. The formation of this pattern increases the probability of a major breakdown below the crucial $66 per barrel support level.
The $66 per barrel level holds significant historical importance as a major technical support level dating back to 2016. Since then, oil has only decisively broken below this threshold once, during the unprecedented market turmoil of the COVID-19 pandemic in mid-2020, and that breach was relatively short-lived, lasting a couple of months. Apart from that period, the $66 level has acted as a strong floor for oil prices, having been tested and held numerous times.
A fundamental principle of technical analysis is that the more a support or resistance level is tested, the weaker it becomes. Each test represents another attempt to break through, and with each successful defense, the remaining buying pressure at that level diminishes. Given the repeated tests of the $66 level and the formation of the bearish flag, the likelihood of a decisive break to the downside is growing.
Should oil prices break convincingly below $66 per barrel, a potential downside price target of $43 per barrel emerges based on technical analysis. This target is often derived by measuring the "pole" of the flag (the initial sharp decline) and projecting that distance downwards from the breakout point.
The prospect of oil prices falling to $43 per barrel carries significant macroeconomic implications. Historically, such a sharp and sustained decline in oil prices has often been associated with periods of economic weakness, particularly in major oil-consuming nations like the United States. Therefore, if the technical analysis proves accurate and a breakdown occurs, it would strongly suggest that the U.S. economy is either already in or rapidly approaching a recession. While technical analysis focuses on price action, the potential for such a dramatic price drop in oil aligns with concerns about weakening demand often seen during economic downturns.
