No one could have imagined a little over 4 months ago with crude oil trading at $147, that crude oil would have crashed by 70% and be threatening to break below $40 so soon. Therefore this analysis seeks to to evaluate the prospects for crude oil's future trend over the next 12 months in determining whether crude oil today is a good buy or not.
Crude Oil Inflation Hedge Unwinding and the Recession.
China and other emerging markets are eyeing the fall in crude oil price to utilise huge trade surplus foreign currency reserves to buy up crude oil reserves exposure wherever possible. This has resulted in less of a decline for oil majors' stock prices despite the 70% oil price crash.
Crude oil, as with all asset classes, is being hit by the reversal of the inflation hedging that took place going into mid 2008 that saw crude oil bust through $100 towards $150, the original expectation was for the whole of this inflation hedging to unwind back through $100 and down towards a target of $80 with possible overshoot to the downside once the scale of the credit crisis fully manifested itself. As the oil price rally fed into much higher inflation statistics on the upside, so deleveraging of the inflation hedge is leading to self feeding deflation on the downside which is acting on pushing crude oils to much lower levels than could originally have been estimated.
The deep recession ensures that crude oil demand is being cut faster than that taken up by the emerging economic giants of China and India. Also, the stronger dollar has ensured that the actual falls in foreign currency terms have been less than for the United States. This implies a continued weak trend for crude oil for the duration of the U.S. recession, which is
