Oil Is Headed Toward A Major Recovery If History Has Taught Us Anything

Almost all the historical evidence is now pointing toward an oil price rally over the next three months.

That's according to data from EidoSearch, a new tool that projects potential changes in financial data based on how previous similar trends have played out. Here's a longer explanation of what EidoSearch does.

Here's that projection graph, for the three months ahead, based on the data for the WTI crude price over the last six months:

Almost the whole projection, even the potential downside, suggests that oil prices will rise in the three months ahead. The average return after six months like the period we've just had is 17.3% over the subsequent three months.

There are 21 examples of oil price slumps similar to the current one since 1984. That's using a pattern similarity of 0.80 or above. For patterns, zero represents a trend with no similarity at all and one represents exactly the same pattern. The closer the patterns get to one, the more alike the current collapse they are. 

Here's the variation in the 21: 

There are three examples of a similar oil price slump where the price kept falling. The biggest was in 1993, when prices fell another 9.1% over the next three months. The biggest rise was 124%. It's clear that in almost all of the other examples, oil prices rallied.

The average climb suggests that oil prices will rise by 17.3% in the next three months.

Of course, this is by no means certain at all: It's just what the pattern of previous slumps suggest. But if oil falls much further in the next three months, that will be without any precedent in modern history.