Yesterday I had a really interesting conversation with a superb buddy. He had been following the markets very carefully and wanted to know what I thought of oil. With costs now actively trading above $100 per barrel, several market watchers including my good friend thought costs had been poised to fall within the quick term.
He cited three fundamental drivers indicating oil is overbought: First the market is getting toppy. Second, seasonal weakness from the second quarter would reduce demand. And third, the latest OPEC meeting in Austria would move prices lower.
Now to me, a short term fall in the oil markets would equate to a 10% or 12% correction. This implies oil would must fall to the excessive $80s or low $90s. Might this happen? Before I let you know my ideas, here’s what he mentioned.
Oil is toppy.
Toppy is a time period used frequently to point a near term excessive in a market. Traditionally it refers to a breakdown of an up-trend. This can be found in a head and shoulders sample or the appearance of a resistance line.
Technical analysts love these items. Clearly oil is displaying some very quick time period indicators of hitting resistance at the $102.5 degree. Hitting resistance like this might mean oil is poised to go decrease quick time period.
The second argument was the seasonal slowing expected within the US financial system during the second quarter. It is extensively recognized that the second quarter is at all times slow. The excitement of yr end and Christmas is behind us. New exercise scheduled to start out in the spring and summer time hasn’t hit full stride but. With the economic system slow, demand for fuel and other oil associated merchandise will fall. Decrease demand means decrease prices.
The Wild Card – OPEC
The largest wild card within the argument is OPEC. For those of you who don’t know, OPEC stands for Group of Petroleum Exporting International locations. The thirteen nations that make up the group signify more than 40% of worldwide oil manufacturing. Obviously, what they decide about production has a huge affect on the markets.
Right now OPEC is meeting in Vienna. President Bush has publicly referred to as for an increase in production ranges. If they determine to extend manufacturing (unlikely), prices would most certainly fall.
So, here is the million dollar query. Should we short oil with the expectation of a near time period fall in prices?
I’ve a simple answer “NO, Nada, nope, not in your life, no-approach, NO”. I hope I did not confuse you with my response.
Here’s why I say no.
First is the market really toppy? I do not know what the official definition is – actually I don’t assume there may be one. A “toppy” market is a bit like the famous US Supreme Court docket touch upon obscenity “I comprehend it once i see it.” May the market be toppy? Sure. May it be consolidating? Possibly. Would possibly we still move higher? Why not. I like technical evaluation as a confirmation of elementary influences. Any market technician will inform you fundamentals trump technicals every day . . . and twice on Sunday.
So let us take a look at the fundamentals.
Argument quantity two is about the slowing financial system within the second quarter. Decrease demand means decrease costs. Here is why that is incorrect. Oil is a commodity. Its price is a function of provide and demand. But new demand is available on the market . . . what do you assume pushed prices up from $40 a barrel to over $100? India, China, Russia, and a basket full of different emerging markets. These countries are rising quickly they usually need oil. The fall off of US demand for oil might be quickly changed by demand from these rising countries.
But wait, there’s more . . .
The slowing US financial system has another major influence. The US Greenback will continue to fall. As the economic system weakens, money will flow from the US into different international locations and currencies. This can push the dollar even lower and it has a perverse influence on oil. A weak dollar really makes oil cheaper for everybody else on the planet.
I know it’s unusual but consider it this fashion. All of the oil traded on the planet is denominated in US Dollars. The Euro has appreciated against the US Dollar by more than 15% in the final 12 months or so. Because of this while you and that i spend $100 on a barrel of oil, people in Europe only spend $85 per barrel. Because oil is “cheaper” for them, they will afford to bid up the price of oil.
Finally, OPEC. Information simply got here out (literally a number of moments ago) that they’ve determined to go away oil production ranges unchanged.
“The 13-nation Group of Petroleum Exporting Countries said it opted to maintain current manufacturing ranges because crude supplies are plentiful and demand is anticipated to weaken within the second quarter.”
The fascinating factor about OPEC is they don’t have any teeth. Any member of OPEC can settle for or reject the group resolution on manufacturing. One thing tells me these oil producers moderately like oil at over $100 a barrel. Why wouldn’t they? Look at all the money they’re making.
So there you could have it. I don’t suppose oil prices are going to right any time quickly. Really I think we may see oil at $120 a barrel in the following few months. If you are holding onto any of the oil producers, like Exxon Cell (XOM), don’t let go, the journey should continue for a while.
Writer Box Brian T Mikes has 1 articles online
Brian Mikes is the editor of the Dynamic Wealth Report, a free funding e-newsletter that gives funding ideas and news you can’t get from the mainstream funding press. Brian and his staff carry decades of Wall Road and Silicon Valley expertise that can assist you uncover profitable buying and selling ideas you can use today.
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