Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market: "Relevant Waves Vs. Irrelevant News" - 10th Jul 20
Prepare for the global impact of US COVID-19 resurgence - 10th Jul 20
Golds quick price move increases the odds of a correction - 10th Jul 20
Declaring Your Independence from Currency Debasement - 10th Jul 20
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Crude Oil - Will it go down to $40 or up to $100

Commodities / Forecasts & Technical Analysis Feb 12, 2007 - 03:19 PM GMT

By: Hans_Wagner

Commodities

If you knew the answer to this one, you could make a lot of money and beat the market . So let's take a look at the issues and see what can be determined. First, demand is going to increase over time as an energy-hungry developing world needs more and more energy. Take a look at this chart from the Bank Credit Analyst showing the percentage of global oil consumption that comes from China and India. It is going from the lower left to the upper right, and only slowed during the slowdown in global growth around 2001.

Global Oil consumption, china and india


Crude prices are trading near $59 as of 2/9/07, down considerably from the high of $77 it hit in 2006. Prices were down 10% over the last month. Inventories are high and parts of the northern hemisphere were having an unusually warm winter, though it is getting cold now.

OPEC has claimed they have cut their production and will likely try to cut again, as they would like to maintain prices closer to $60. The problem is that OPEC members cheat. It is one of the few reliable factors in the oil business. As a result much of the actual burden of production cuts falls on the shoulders of Saudi Arabia. They have done the work so far, but will it be enough? There is reason to think they might let oil prices drop even further in the near term. And here, I want to highlight some fascinating research by Ben Dell and his team at Bernstein Research.

Today, there are about 2.5 million barrels of spare production capacity (excluding Iraq, Nigeria, and Venezuela), with almost all of it controlled by OPEC. If OPEC actually cut production as they say they will, they could work through the high inventories and take the price back up to over $65. By the way, excess capacity is on target to rise to 4 million barrels a day in 2008, even with solid growth of 1.8% in world demand. There is a lot of new production coming online.

The problem for OPEC, however, is that most members cheat. So far Saudi Arabia has been willing to cut enough to make up for their cheating partners. But it looks like they will have to make further deep cuts in production, to 8 million barrels a day, which is below levels not seen since 1991 or the aftermath of 9/11 in 2001.

But the Saudis have said they intend to increase their production capacity to 12.5 million barrels per day by the end of the decade from 10 million barrels presently. They are spending the money to increase their capacity, and significant new capacity will come online this year and next.

Bernstein concludes: "The dilemma facing Saudi continues to grow. While cutting back incremental heavy barrels when crude prices were $75/bbl was relatively painless, the country is now facing the prospect of having to drop below 8Mbpd to keep the market balanced. At the same time, Saudi Aramco is undertaking one of the biggest investment programs over the last 20 years, as evidenced by the soaring rig count and multiple field reactivations. Of these, the AFK field is the first to come online in 3Q/4Q 2007 for 500kbpd and 1Bcfd.

"Should Saudi decide to hold back volumes to maintain prices, their proven capacity utilization would probably need to drop to 75-77%, which has historically been a threshold level. While this may sustain pricing for others it would of course lower Saudi's market share, given that few other OPEC members seem inclined to assist. Furthermore, it would continue to stimulate the oversupply in the market, hence prolonging the problem. Evidence of any countries 'cheating' on their production cuts may emerge soon with the IEA and OPEC January reports, which will be published later this month, or through February when the new quota system comes in, and will highlight the extent of the compliance within the OPEC group.

"In reality we think this is not a path that makes sense to Saudi in the long term. A sharp correction in crude prices (and especially futures prices), spurring new demand and delaying non-OPEC capacity expansions would generate short term pain but longer term gain. At the same time, the Saudis would regain control of the market while negating the Iranian threat to their leadership in the region. As always this remains something of a guessing game. However, it appears that there is only so low Saudi will go. Based on history, we are months from reaching that threshold.

"Given the weakening fundamentals of growing spare capacity, moderating demand, the high expectations for the peer group and the weakening gas market, it appears challenging to see 2007 as a year of outperformance."

Thus, the dilemma for investors. You can't really show a supply demand chart for 2007 and draw any real conclusions about price. Yes, sometime next decade demand may indeed start to bump up against supply, but the price of oil today is as much political as it is supply and demand.

If Saudi Arabia decides that the rest of OPEC is not doing its fair share of cuts, it could simply allow the price of oil to drop to $40 for a short period of time, causing some real pain. The fact that it would hurt Iran as much or more is probably not lost in the inner chambers of Riyadh. At $40 oil, Iran does not have the spare cash it needs, let alone has promised. It could make the current regime a lot more shaky.

A drastic drop in oil prices would let everyone in OPEC know they need to get with the program. Also, it would stop a lot of new oil projects around the world and stimulate demand (as lower prices always do). To get all of that to happen might be worth a little fall in cash flow for a few months or quarters. And when their new capacity comes online as world demand grows, the rest of OPEC goes along with production quotas to maintain higher prices. As world demand grows, and prices rise, Saudi pockets even more vast sums of money. And they let Iran know who holds the real power.

Thus, there is no "normal" price for oil. It is still what a few men with willpower sitting around a table decide it is. Ultimately, OPEC will lose that power, as world demand grows past supply, but that is not this decade. At that point, the market will set price.

Of course, the price of oil could shoot up with a collapse in Nigeria, as rebels are becoming increasingly active. Or Iraq or any number of unstable regions that produce oil could have problems.

So what does a technical view of oil show us? The chart below is a multi year picture of oil showing long term up trends beginning in 1999 and 2002 that have not been broken. The steeper trend that began in the later half of 2003 was broken late in 2006. It now acts as resistance on any move up. Of particular interest is the 50 week moving average that has acted as support on up trends and resistance on moves down. The 200 week moving average could also act as support in the 50 area.

While it has not finished forming, we may be looking at a large ascending triangle for oil with either of the two longer up trends acting as support. If this is the case then oil will move up and down for a while between 77 and 45 area (assuming the up trend that begin in 2002 holds).

large ascending triangle for oil with either of the two longer up trends acting as support

As investors, oil is an important economic factor. Given this analysis, it looks like oil prices are not likely to go down to $40 and stay there for long. They also are not likely to go to $100 any time soon, baring any major disruption in the supply. This framework give us a way to find oil related opportunities, buying when it finds support and selling at resistance, while keeping a watchful eye on the political and economic factors that affect oil. Our Stock Research has identified a couple of energy companies that offer good value. We will likely come back to this idea at key opportune times.

Finally, it makes one think that if the major economies of the world could reduce their dependence on oil, how it might change some of the current geopolitical situation.

by Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

kelvin thumar
18 Jul 07, 15:24
want to know about crude price

hi respected sirs,

i am kelvin thumar from india .

i want to know the crude future price is $75 dollar .

but i want to know in next 2 or 3 months it will reach around $85 $90 dollar.

i want to invest in crude oil.

give some important note and data and also website from which i can know for crude prices.

hoping for favourable reply.

and one thing i want to know which data effects to up crude prices


sanjay
20 Jul 08, 02:59
crude oil

this week crude oil go up or down?


Medardo Biano
12 Aug 08, 08:29
Prices of Crude oil in the next 3 months

Is it possible that the prices will hover back to $40/bbl? This will ease the tension here in our country (Philippines)


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules