Why There Will Never Again Be Cheap Oil
Oil 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.
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.