Crude Oil has been in a free fall since the summer of 2014. A multitude of factors are at play. The supply glut due to record high production in the U.S. and Canada and global slow-down leading to reduced demand are some of the fundamental reasons behind the crude’s collapse. Technically too, the crude looks to be broken, though, it is showing some signs of bottoming.

The obvious question is when will it bottom? Is the 8% surge on Friday, January 30, 2015, a reversal or something else? Many attributed WTI Light Crude Oil’s big advance on Friday to traders’ fear of taking a short position over the weekend. If that is a major factor in the rise then it is not certain if it could be sustained. Also, the Monday’s price action does not really qualify as a follow-through as price has yet to cross over Friday’s high.

Oil Rig Counts Are Shuttering

One outcome of the falling crude prices is that the major oil producers in North America are shutting down oil-rigs.

During the month of January, the North American producers continued to take rigs off-line in response to prolonged drop in crude prices.

Baker Hughes, which has published weekly rig-counts since 1944, reported that for the last week of January, the number of operating rigs in the U.S.A. fell by the biggest count in a long time.

For the week ending January 30th, the U.S. rig-count dropped by 90 and Canadian count by 38. The current levels are below the January 2014 levels by 242 rigs for the U.S. and by 214 rigs for Canada. Texas’s month-end rig count is 695, down from 840 at the beginning of the month. The weekly fall in rig-count is biggest since 1987.

Historically, the rig-count rises and falls based upon the price of crude and the demand for it but this time the reduction has been much more swift than previous occasions. Usually a reduction in rig-count also leads to a reduction in employment as both are directly proportional. This time too it has not been any different. Many oil companies have announced layoffs and cap-ex cuts.

The rig-count-to-crude-price chart shows that the rig-count lag the price of West Texas Light Crude Oil. The count usually peaks and bottoms after crude oil. So even if crude price rise now, the rig-count will probably go down a bit more.

Also, just because the rig-count has dropped a lot does not mean that crude-oil will stop its fall. What is clear, however, is that when rig-count starts to rise then, usually, the crude-price gets on an up or stable trend.

The WTI Light Crude peaked in July 2008 and at the beginning of that month, the U.S. rig-count stood at 1,921. Its peak came in mid-September at 2,031, almost two months after the crude price peak.

On the downside, crude bottomed in February 2009. By the end of January 2009, the rig-count had dropped to 1,472. The count eventually bottomed at 876 in mid-June, approximately four months after the crude price bottom.

During this cycle, the crude oil peaked in June 2014. At the beginning of that month the rig-count stood at 1,866. The count peaked at 1,931 in mid-September, three months after the crude peak. By the end of January 2015, the rig-count is at 1,543.

Chart Patterns Give Hope But Not Much

On the monthly timeframe, WTI Light Crude topped out in April-May 2011 at $114.83 after bottoming out in January-February 2009. This top was right in the middle of two Fibonacci retracement levels – $122.93 and $103.82 – of the big fall from the high of $147.27 made in July 2008 to the low of $33.20 made in January 2009.

From April 2011 to September 2014, crude oil formed a symmetrical triangle. On the lower bound it made two higher lows – one in October 2011 of $74.95 and another in June 2012 of $77.28.

On the upper bound, it made two lower highs – one in April 2011 of $114.18 and another in August 2013 of 112.24.

In October 2014, crude oil convincingly broke below the triangle. The measured target of this pattern on the downside is around $46.

This target is also near Fibonacci retracement levels. The 78.6% Fibonacci levels for the crude’s advance from 2009 to 2011 high is around $51. The 89% Fibonacci level is around $42. So far crude has made a low of $43.58 on January 29, 2015.

On daily time-frame, crude is making a horizontal channel at the bottom. A break above this channel will be short-term bullish and would form a sharp reversal. On the other hand if this channel prolongs then it may become saucer or a round-bottom, both of which are much more powerful and reliable.

However, crude had already once tried to make such a pattern from mid-October to early November in 2014, which did not work out well. It fell another 30+ points after that pattern broke.

On the weekly timeframe, the RSI is showing a divergence. The low price on the week of January 12 was $44.20 and the 9-period RSI was 5.83. During the week of January 26, crude made a lower low of $43.58 but the 9-period RSI was 15.08.

The time elapsed between these two observation is not much – only one weekly bar – hence the signal is not very powerful but it is still a divergence.

During the 2008 debacle, the WTI crude decline lasted only seven months – from July to February. So far in the current downturn, the decline has already lasted for seven month – June to January. Is that enough along with other technical indicators for crude to arrest its slide and rally? Next few days and weeks price-action will give us the clue.

As things stand today, the chance of crude oil going down in the near future are low, though not zero. But it also does not mean that crude will rally immediately. The probability of it breaking out soon exist but it is more probable that crude will stay range bound at this level for some time. Also, keep an eye on the rigs in operation. If rig-count starts to increase then we will know that the crude is on a sustainable uptrend.