How Are Oil Prices Reacting Now
Yesterday I had a very fascinating conversation with a very good friend. He had been following the markets very carefully and needed to know what I considered oil. With prices now actively buying and selling above $a hundred per barrel, several market watchers including my buddy thought costs had been poised to fall within the brief time period.
He cited three predominant drivers indicating oil is overbought: First the market is getting toppy. Second, seasonal weakness from the second quarter would cut back demand. And third, the current OPEC assembly in Austria would move costs decrease.
Now to me, a brief time period fall within the oil markets would equate to a ten% or 12% correction. This implies oil would need to fall to the high $80s or low $90s. Might this occur Before I inform you my thoughts, this is what he said.
Oil is toppy.
Toppy is a term used often to point a close to term high in a market. Historically it refers to a breakdown of an up-trend. This can be found in a head and shoulders pattern or the looks of a resistance line.
Technical analysts love these items. Clearly oil is exhibiting some very quick term signs of hitting resistance on the $102.5 degree. Hitting resistance like this might mean oil is poised to go decrease quick term.
The second argument was the seasonal slowing anticipated within the US financial system during the second quarter. It’s widely identified that the second quarter is always slow. The excitement of year finish and Christmas is behind us. New activity scheduled to start out within the spring and summer hasn’t hit full stride yet. With the financial system gradual, demand for fuel and different oil related products will fall. Decrease demand means decrease prices.
The Wild Card – OPEC
The biggest wild card within the argument is OPEC. For these of you who do not know, OPEC stands for Group of Petroleum Exporting Nations. The 13 nations that make up the group symbolize more than 40% of world oil production. Obviously, what they determine about manufacturing has a huge affect on the markets.
Proper now OPEC is assembly in Vienna. President Bush has publicly called for a rise in production levels. If they decide to increase manufacturing (unlikely), prices would most definitely fall.
So, this is the million dollar query. Should we short oil with the expectation of a near time period fall in costs
I’ve an easy answer “NO, Nada, nope, not on your life, no-approach, NO”. I hope I didn’t confuse you with my response.
Here is why I say no.
First is the market actually toppy I have no idea what the official definition is – truly I don’t think there may be one. A “toppy” market is a bit like the famous US Supreme Court docket touch upon obscenity “I understand it after i see it.” Would possibly the market be toppy Positive. Might it’s consolidating Perhaps. Might we nonetheless move increased Why not. I like technical analysis as a affirmation of fundamental influences. Any market technician will let you know fundamentals trump technicals each day . . . and twice on Sunday.
So let us take a look at the fundamentals.
Argument number two is concerning the slowing economy within the second quarter. Lower demand means lower costs. Here is why this is incorrect. Oil is a commodity. Its worth is a perform of provide and demand. But new demand is in the marketplace . . . what do you suppose pushed costs up from $40 a barrel to over $a hundred India, China, Russia, and a basket stuffed with other emerging markets. These nations are rising quickly and they want oil. The fall off of US demand for oil will be quickly changed by demand from these rising international locations.
However wait, there’s more . . .
The slowing US economy has one other major influence. The US Dollar will proceed to fall. As the financial system weakens, cash will circulation from the US into other nations and currencies. This will push the dollar even decrease and it has a perverse impact on oil. A weak dollar truly makes oil cheaper for everybody else on the planet.
I do know it’s unusual but think of it this way. The entire oil traded in the world is denominated in US Dollars. The Euro has appreciated in opposition to the US Dollar by greater than 15% within the last year or so. This means that when you and i spend $one hundred on a barrel of oil, individuals in Europe only spend $85 per barrel. Because oil is “cheaper” for them, they’ll afford to bid up the value of oil.
Finally, OPEC. Information simply got here out (actually just a few moments ago) that they’ve determined to leave oil manufacturing ranges unchanged.
“The 13-nation Organization of Petroleum Exporting Nations stated it opted to maintain present manufacturing ranges because crude supplies are plentiful and demand is predicted to weaken within the second quarter.”
The fascinating thing about OPEC is they have no teeth. Any member of OPEC can accept or reject the group resolution on production. One thing tells me these oil producers moderately like oil at over $a hundred a barrel. Why wouldn’t they Look in any respect the cash they’re making.
So there you could have it. I don’t think oil prices are going to right any time soon. Really I think we might see oil at $one hundred twenty a barrel in the next few months. If you’re holding onto any of the oil producers, like Exxon Cellular (XOM), do not let go, the journey ought to continue for some time.
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