About Oil Prices

William Kurtz asked:


To the oil-producing nations, it must have seemed like forever that Crude Oil prices slid down, down, and down some more after the remarkable Highs of last Summer.  To those nations whose budgets were based on the assumption of Crude prices at $85 or $100 per barrel, assumptions were thrown askew as prices descended below those levels and then down as far as $44 per barrel.  Saudi Arabia may not have cared terribly much, since among all producing nations it is the low-cost producer at – we have heard – only $3 per barrel.  But to those countries which harbor special agendas, such as Iran and Venezuela, $44 oil bit hard.

Now, with oil at about $68 per barrel, Mr. Chavez has a freer hand in subsidizing his own favored client states such as Cuba and Honduras.  He may not be aware of it, but that little party is going to come to an end.

Surely there can be little doubt that the massive decline in Crude prices since last Summer was an impulsive move, a demonstration of a major trend in motion.  What we have seen since the bottom in March 2009 is an upward a-b-c correction of that underlying trend.  That correction has now run its course.  It is in the nature of all upward corrections that, when they are done, prices revert to levels lower than those which obtained before the correction began.  This necessarily means that we will see Crude Oil below $44 per barrel – possibly below $30.

Once again, this will raise havoc with the budgets of most of the producing nations, while industrial and individual consumers will be delighted.

In particular, the Candlestick pattern in Crude Oil today lends credence to the proposition that, indeed, the price of Crude has peaked and is now headed Down again.  True, one day does not a trend make.  Even so, we see a tall black price bar today (a “down” day) which bearishly engulfed the “real body” price action of the two preceding days and nearly engulfed the day before that.  We take this pattern to be bearish.  In addition, it appears that Monday’s high was the top of Wave 2 of the first down-up move in a decline.  When and if prices now continue to decline below 67.40 – the low of Wave 1 – the die will have been cast and prices should continue to fall thereafter.

If this scenario comes to pass, we can expect to see a recurrence of budget troubles in Iran, Venezuela, Russia, and Iraq too.  Old assumptions will be put to the test again, and will be found wanting.  One can foresee the possibilities of civil unrest; and one wonders what effect may be felt by the hugely repressive regime in Iran which, unfortunately, again holds its own people in thrall, now to a greater extent than ever.

Whichever way Crude Oil prices may go from here, we know this much: their likely course will be foretold by the Candlestick patterns in the price charts.

William Kurtz      July 1, 2009

 



Rapala Fishing Lures

Neil Kokemuller asked:


Oil peaked above $73 per barrel last week, but prices have dropped steadily, with a strong fall below $67. Expiring crude for July delivery expired on Monday, with speculators pushing rates down $2.62, to settle at $66.93. US crude for August delivery also quickly dipped to the $67 per barrel level.  

New economic data and warnings on a global front sent a message to markets that the economic recovery was likely to be slow. This signaled oil speculators to assume that demand for oil would not pick up as quickly as some had previously anticipated. This factor, along with more weakness in the dollar, helped lead the dip in oil.  

In other oil news, Kuwait’s oil minister Sheikh Ahmad al-Abdullah al-Sabah said that the Organization of the Petroleum Exporting Countries (OPEC) is not going to cut output at its September meeting. This means that production should remain constant, while demand is not going to pick up swiftly. The Sheikh did say that the organization is going to increase insistence that members comply with previously agreed upon cuts.  

OPEC, the world’s top producing oil countries and the leading oil exporting group, would like to see oil at a near-term price point of $80 per barrel. However, it is hard for the organization to have as much control over the market when economies are down worldwide and the dollar is weak. Consumers and businesses still seem prepared to hold steady on transportation, and oil and gas consumption. This more consumer-controlled market is quite different than the situation in oil last July when prices topped out above $147.  

Although OPEC could make production cuts to try to help drive oil prices higher, it would be difficult to get a majority of the group’s members to agree to such cuts, given their need to export. The members also seem to recognize that economic recovery and upward equities movement are the major catalyst needed to drive demand for oil. The market is waiting for solid evidence that the economy is not only on the way back up, but has a firm grip in its recovery efforts.  

One positive sign on Tuesday was a report on previously owned home sales that showed growth of 2.4 per cent from April to May. This was the third monthly gain of the year. While the number was below analyst expectations, it does show stability in housing, convincing some that real estate has hit bottom. Foreclosures, higher mortgage rates, and other market delays are still a burden on the market, though.  

Housing is one of the closely watched economic sectors in terms of the overall picture of the economy. Currency speculators will have a lot of to say about the potential for oil to climb as well. Continued weakness in the US dollar will stifle any hope for higher oil and will likely push prices lower.  Of course, consumers would see lower fuel prices as a bonus.



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