Is an Oil Rebound Imminent?

I’m not about to call an oil bottom but there certainly are some signs that suggest the bottom is drawing near. I remember thinking oil was going to bottom at 95, then 60, and here we are at 40 and all the peak oil enthusiasts are saying we are going to rebound just as fast as we have collapsed. Here’s my take on where we stand. 1. The bubble has burst in oil and then some, which most healthy corrections have to go through. Just as targets on the upside overshoot, they’re equally as cruel on the return trip. 2. Long term support does seem to be in the $40 range based on previous tops. 3. There is a long term trendline that does appear to coincide with the $40 range as support. 4. I’ve heard from the media oil targets as low as $20-25, which does seem to be a bit outrageous, indicating oil sentiment is very low. 5. It’s plausible that a worldwide recession is what is really baked into the price of oil bringing it from $148 to $40. While it’s not inconceivable to think oil could fall further, I think it could be a bullish sign for the markets if the oil sector rebounds. I could see them both rallying in tandem as it could to some type of economic rebound. Long term high oil is bad for the markets, but shorter term it could help investors come to grips with the worldwide economy not coming to an end. I almost forgot to add this chart of USO showing the highest daily volume close since this instrument peaked back in July. Could prove to be significant showing that capitulation might be setting in. Related Stocks: USO

Comments

[Tedsan:]

Jeff,

I have a couple problems with your analysis.
First, in your graph, you show a linear trendline for data that are obviously rising on a curve. If you do a proper curve fit, you're going to extrapolate something more along the lines of $100-$120 oil.

Second, I think you're grossly underestimating the effects of point 5. I would contend that the worldwide economic slowdown is responsible for 90%-100% of the receding oil prices.

Just look at the facts - Earlier this year, while the world's economies were chugging along, oil demand had increased to the point that we were using more oil than we were able to supply. World oil reserves were being drawn down to meet the incredible demand. Had the world economies not crashed, it is likely that we would be seeing $200 oil right now. But they DID crash, and now there's several million barrels of excess capacity. When you have that much extra supply, prices must plummet. What we're seeing in oil prices is completely predictable based on the demand destruction.

Note however, I'm not saying that the huge demand we saw was sustainable. The rampant consumer spending which was driving the industrial energy consumption was obviously not sustainable. I've been saying for years that these markets were a big pyramid scheme, built on unsustainable consumer debt levels.
Ultimately, when the economy settles down, and consumers start actually saving again, rather than living on credit, world oil demand will pick up in line with population growth and the increase of the standard of living in emerging nations. At that point, we're going to see the supply and demand curves cross again due to the reality of supply inadequacy. Then, we'll see all the peak oil discussions come back to the fore.
Nobody, and I mean nobody, can predict when that will happen. The world economies are in a state of chaos, and we have no idea how long it will take to settle. Obama's economic plans may stabilize the economy in the next few years, or we may see other crashes continue to demolish our economy. so it could be 3 years or 20. But the fundamentals are the same. Supply and demand will forever drive oil prices.

2008 Dec 07 09:11 AM

[john s. gordon:]

receding oil prices caused by hedge finds & speculators unwinding their overleveraged positions. will probably stop soon. then normal market forces will start to prevail.
> jack

2008 Dec 07 09:16 AM

[Ferdinand E...:]

Oil is one of my favorite subjects, and I can only remember being wrong about it once That was approximately 25 years ago.

At the present time however I mostly leave it alone except for some theoretical excursions. Why worry about the oil price when the global macroeconomy might tank at almost any time? But be aware of one thing: oil is scarce, given the demand for it that will appear in the future, and perhaps the near future. The OPEC countries have made a bundle in the last year or two, and more important they know that time is on their side.

2008 Dec 07 10:59 AM

[Steven Ward:]

I worked for Amoco oil Co. for 20 years and all through the process, except for the North Sea production in the 90's, OPEC, particularly Saudi Arabia, held the keys on the supply side.
Since inception OPEC has never been able to maintain a consistent high price level. In that way it is a failure as acartel.But OPEC has been able to demonstrate a remarkable ability to drag the price of oil off the floor. But here it has always taken them 18 to 24 months to get that done. The result was to put in a higher floor, not a ceiling. Thus prices moved up slowly.
Now the Saudis are no longer willing to be the swing producer and they have no desire to see any further of their investments tank to zero in the West, so low oil prices maybe with us alot longer than expected.

2008 Dec 07 01:12 PM

[Pipo:]

Oil had the biggest weekly drop since the Persian Gulf War in 1991. Is a major shor squeeze just around the corner?

www.oiltradersblog.blo...

2008 Dec 07 01:22 PM

[NOWHEREMAN:]

Our economy needs a major shot of inflation in the arm, body, leg , head, anywhere. If it produces stagflation, so be it.

Maintenance of current capacity levels presumes the depletion of roughly 3-4 million brls daily whether they are used or not. Energy commission estimate of 6.7% decrease annually in current oil field supply. Combine this with project delays/shutdowns and the demand destruction in the Alt. E. sector with oil at present prices, we will be really, really screwed when Obama begins the Commodity intensive infrastructure package.

It will be much better to suffer in the short run with the stimulus $70 oil will bring than next year when less is available.

For whatever reason, oil managed to hit $147 with the US economy already 7 months into a recession. What will happen if the US tries to go full bore?

IMHO

2008 Dec 08 03:15 AM