Investment Contrarians

Why There Will Never Again Be Cheap Oil

By for Investment Contrarians |

Cheap OilOil prices recently briefly traded at $100.00 a barrel prior to retrenching back down towards the $90.00 level. Yet, having been in a bear market in June, oil has since rallied. The November West Texas Intermediate (WTI) futures contract is up 16.7% from its 12-month low. While the November oil is displaying a bearish death cross on the chart with the 50-day moving average (MA) of $93.92 below its 200-day MA of $97.52.

The chart appears to be showing a bullish flag formation setting up, which means that higher oil prices—to over $115.00 in the best-case scenario—could be coming, based on my technical analysis.

I believe oil will continue to hold above at least $80.00 a barrel going forward and will rally as the global economy strengthens. Extending the contract to 2020, the current prices range from $86.00 to $93.00.

Helping to add support will be the continued erosion in the major economies in the eurozone, the U.S., and China. Also add in the geopolitical issues in the Middle East and rising tensions in the South China Seas between China and Japan.

Light Crude Oil Chart

Chart courtesy of www.StockCharts.com

I also expect oil prices to be supported by the Organization of Petroleum Exporting Countries (OPEC) oil cartel. OPEC estimates oil prices in nominal terms could hold in a range of $85.00 to $95.00 a barrel for the rest of this decade, according to its internally produced World Oil Outlook (WOO). The report blames the spikes in oil prices on speculators, which I fully agree with, but it’s part of the business. An interesting note in the WOO report is the assumption that oil will reach $133.00 per barrel by 2035.

It’s interesting to understand how the oil cartel thinks. The report says that the current level in oil prices is due to the state of the global economy that “will be marked by below-average trend growth, in combination with high unemployment in developed economies and continuing global growth imbalances.”

And while oil prices are estimated to trade at below $100.00 a barrel for the next eight years, you know that there will be volatility that can drive prices to well above $100.00. Factors include speculation and troubles in the oil-producing regions in the Middle East. Hostilities in the oil-producing regions can easily trigger a spike in oil and gasoline prices.

Recall what happened in Libya, as the country was vulnerable to enter into a civil war prior to the killing of Colonel Qadhafi. With the 12th largest oil reserve in the world, any major disruption to the oil flow from Libya could have sent world oil prices surging.

The ability of OPEC oil prices to have an impact on our thirst for oil continues to be an issue that needs to be resolved whether through alternative energies or other sources of oil.

Energy mogul T. Boone Pickens has long pushed the use of natural gas energy; thereby cutting the country’s dependence on foreign oil from OPEC.

Of course, a good option that may help to solve some of the impact from OPEC oil is the building of a pipeline that will bring oil from the massive Canadian tar sands to Texas. This is a viable option, but there is some resistance due to concerns regarding the environmental impact relating to the process of deriving oil from the tar sands.

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  • J.W. Pulley

    I agree with some of what you say but not all since my family have been in the field for decades.
    If we were to drill in our own country, USA, oil prices would drop drastically due to the facts of bypassing OPEC and not having the expense of shipping crude half-way around the planet.These are only a couple examples.
    Considering the U.S. is the biggest world customer for crude and we already have the worlds largest natural gas deposits, why not control both in at least the Western Hemisphere.
    There was a time when America supplied the world and that time can return.We have to take care of a few problems before that can happen.
    First, get that ignorant, spineless, cowardly, community organizer, waste of human cell tissue Barack Obama and his glue-sniffing followers, aka democrats, the hell out of office to where we can lower these ignoranus EPA regulations that make less than zero sense especially since the U.S. has always done things safer and better.
    Second, if the democrats don't like it we can deport the jelly skull liberals to Europe, most likely France, where idiots and cowards roam freely.
    Two simple ways to lower oil prices from a economic minded combat Marine Veteran that unlike the left, understands how capitalism works!
    Semper Fi

  • Guillermo Chinni

    The trust is that this is an economical issue: I sell my goods according to the rules of the capital market. I sell as high as possible as the markets ( demand ) permit me to do so, I am in the business to make the biggest profit as possible, and I move around this issue and their variables. Is that simple , if world contamination , or other variable , gets important to the general public , and then change the demand , then will be consider in the variables for the maximum possible profit. We all know the way to influence in the public opinion , and this is what the people involve in the business work in order that their business keep producing the maximum profit.

    It has nothing to do with xenophobia or nationalism extremes, is a more power concept , is the power of money .

  • cleese

    JW you won't get very far with anything if you and others like you don't stick to the common ground solutions we all need. The reality is overall people are tired of dealing with elitists attitudes that resort to insults and mudslinging instead of the goal in general. That applies to both sides of the political aisle.

    You had my interest and attention until you stepped into that category. Then you lost my respect and support because you are a part of the ongoing polarization and divide being created by the constant barrage of negative attitudes over positive substance in our leaders.

  • Cajun Man

    Personally, I think JW should tell us what he really thinks. BTW, I agree with him.

  • http://www.facebook.com/people/Eric-Van-Bezooijen/1237106 Eric Van Bezooijen

    Oil production has been increasing steadily during President Obama's Presidency, as so much "fracked" oil is being produced in places like North Dakota that we don't have enough infrastructure to transport it.

    The United States has both more total oil wells drilled AND more total producing oil wells than the rest of the world, combined.

    We only have a small percentage of world-wide reserves, and although our production has been going up by quite a bit, it's still only a relatively small fraction of world oil production. Since most reserves are in the Middle East, it is OPEC, not us, who can control supply.

    However, since we *consume* 1/4 of the world's oil while having only 5% of the world's population, we can have a huge effect on world oil prices by consuming less. This was best demonstrated during the 2008 economic crash, when our consumption of oil dropped dramatically, and the price of oil and gasoline followed.