Yesterday I’d a very intriguing conversation with a great friend. He’d been following the markets really strongly and needed to know what I believed about petroleum. With prices now definitely trading above a hundred dollars per barrel, many industry watchers such as my good friend believed prices have been poised to fall within the short term.
He cited 3 major drivers indicating engine oil is overbought: First, the industry is becoming toppy. Next, seasonal weakness through the next quarter would lessen demand. And third, the latest OPEC meeting in Austria will move prices lower.
However, to me, a temporary autumn within the engine oil markets would equate to a ten % or even twelve % correction. This means oil will have to fall to the higher $80s or even low $90s. Can this happen? Before I let you know my ideas, here is what he said.
Oil is toppy.
Toppy is a phrase used often to signify a near-term very high in a marketplace. Traditionally it describes a breakdown of an uptrend. This may be discovered in ahead and the look or shoulders pattern of an opposition line.
Technical analysts enjoy the stuff. Clearly, oil is showing some really temporary signs of hitting opposition at the $102.5 fitness level. Hitting resistance this way might imply oil is poised to go cheaper short term.
The next argument was the seasonal slowing expected in the US economic climate during the 2nd quarter. It is widely known the second quarter is always gradual. The joy of season end, as well as Christmas, is behind us. New action slated get started on in the summer and spring has not hit full stride just yet. With the economy gradually, need for gas along with other oil associated products will fall. Lower demand implies lower costs.
The Wild Card – OPEC
The largest wild card in the argument is OPEC. For people that do not understand, OPEC stands for Organization of Petroleum Exporting Countries. The 13 countries which form the group represent more than forty % of worldwide oil production. Clearly, what they choose about creation has an enormous impact on the markets.
Right today OPEC is meeting in Vienna. President Bush has publicly called for increased production levels. In case they opt to boost production () that is unlikely, prices would most definitely fall.
So, here is the thousand dollar question. Should we short oil with the hope of a near-term autumn in costs?
I have a simple solution “NO, Nada, nope, not on your wellbeing, no way, NO”. I am hoping I did not confuse you with my reaction.
Here is the reason I say no.
First maybe the market actually toppy? I’ve absolutely no idea what the official description is – essentially I do not believe there’s one. A “toppy” market is somewhat like the popular US Supreme Court comment on obscenity “I know it when I notice it.” Might the marketplace be toppy? Sure. May it be consolidating? Maybe. Might we still go higher? Precisely why not. I love complex evaluation as a confirmation of elementary influences. Any market technician is going to tell you fundamentals trump technicals every morning… along with two times on Sunday.
So let us take a look at the basics.
Argument number 2 is all about the slowing economy within the 2nd quarter. Lower demand implies lower costs. Here’s the reason this’s wrong. Engine oil is an investment. Its price tag is a characteristic of demand and supply. But the brand new need is on the marketplace… which food do you feel pushed prices up from forty dollars a barrel to more than a hundred dollars? India, Russia, China, along with a basket full of some other emerging markets. These countries are growing quickly and they require oil. The fall off of US need for oil is going to be immediately supplanted by need from these developing countries.
But wait, there is much more…
The delaying US economy has another big impact. The US Dollar is going to continue to drop. As the economic system weakens, cash is going to flow from the US into various places and currencies. This will drive the dollar much lower and it’s a perverse effect on oil. A weak dollar truly makes oil cheaper for everybody else within the world.
I realize it’s weird but consider it this way. Many of the engine oil traded on the planet is denominated in US Dollars. The Euro has appreciated contrary to the US Dollar by over fifteen % during the last year or thereabouts. Which means that while you and I invest hundred dollars on a barrel of petroleum, folks in Europe just spend eighty-five dollars per barrel. Because engine oil “cheaper” for them, they are able to bid up the cost of oil.
Finally, OPEC. News only came out (literally a couple of moments ago) that they’ve chosen to leave oil production levels unmodified.
“The 13 nation Organization of Petroleum Exporting Countries explained it opted to keep today’s production levels because crude items are abundant as well as the need is likely to weaken in the 2nd quarter.”
The intriguing thing about OPEC is they’ve no teeth. Any part of OPEC is able to accept or perhaps reject the group choice on production. Something tells me these oil producers quite love oil at more than hundred dollars a barrel. Precisely why would not they? Take a look at all of the cash they’re making.
And so there you’ve it. I do not believe oil prices will fix sometime soon. Essentially I believe we can observe oil at $120 a barrel within the next several months. In case you’re holding onto the engine oil producers, like Exxon Mobile (XOM), do not let go, the drive has to remain for a while now. emmanuel ibe kachikwu often shares his insights about the Oil and Gas sector in his country on his Social Media pages. Be sure to check them out to be updated.