Oil to Retest $40/Barrel by Year-End?

From a long-term, fundamental perspective, I am actually bullish on oil (and commodities, in general). Why? Because I am extremely bearish on the dollar long-term.

I am confident that all of this money printing and quantitative easing will eventually bring the dollar to its knees (Why do you think China, Russia, and India are pounding the table for a new reserve currency?). I think the debasing of the U.S. dollar will eventually lead to hyperinflation.

But that is a topic for another post (I don't even want to get started on the Social Security and Medicare time bombs that are set to detonate in the next few years that will ultimately cause the printing presses to overheat)...

That being said, I think the short-term fundamentals for oil stink. Now that the recent relief rally has lost its steam, weak economic growth, falling global demand, and rising supplies are probably going to be the key drivers of oil prices over the next 6-12 months....and I think oil could retest $40 per barrel by the end of the year...

From a technical perspective, the signals are finally starting to line up with the short-term fundamentals. The recent rally from the December 2008 lows has led to some conflicting technical signals on the daily and weekly charts over the past few months. As shown in the daily chart below, oil has been in a clear uptrend since late March.

However, the long-term downward trend on the weekly chart has remained intact. Isn't technical analysis fun?

Over the past week or so, the daily and weekly charts have started to give us the same bearish signals. On the daily chart, oil broke through the 50-day moving average today and it looks like the recent uptrend is in jeopardy. In addition, we have seen some RSI divergence since the mid-June peak. On the weekly chart, oil ran into resistance last month at the 200-week moving average and has since continued along the long-term downtrend.

In trading, I find value in technical analysis because I think it greatly puts the odds in your favor when used correctly (especially when combined with sound fundamental analysis). My goal is to find low risk trades with a high reward to risk ratio. I try to be patient until I have multiple signals pointing in the same direction...which usually allows me to set tight stops (i.e., it keeps my risks low).

That being said, the short signals for oil (fundamental and technical) are now aligned...and I think oil could retest the December 2008 lows by the end of the year...

Full Disclosure: No positions yet. However, I will be building a directionally short oil position over the next few trading sessions.

Comments

[whisperonth...:]

Thank you, Snitzer, I was going to say that too. After working for 40-50 years, paying in, fighting in war after war, I also object to being coupled with the entitlement generation, which I consider those who have either spent their lives living on Medicaid (not medicare, which we pay for week after week) and those who have been given everything from cars to college educations just for the privilege of being someone's kid. And most of us baby boomers are going to have to keep on working, past our expected 60 years old point, past our 65 years old point, well into our 70's to get what we were led to expect.

There should have been more than enough money in those funds to support all of us, if the governments (both political parties) hadn't 'borrowed' it, if they had even paid it back dollar for dollar, and there would have been a lot left over for the following generations. Now, most of us are left hoping that there will at least be enough to support us until we die, so we don't have to depend on the government to screw everything else up.

It's a shame. Shouldn't have happened. Maybe we should be investing in oil, since we know OPEC won't let it stay around $40 for long, and it kept going even when our banking industry crashed. Besides, most oil/gas companies are spreading out into the clean energy, and I imagine there will be a smooth transition further down the line. More reliable than betting our government will be able to handle our money, anyway.

Jul 08 05:23 PM

[2contango:]

Look at longer-term charts. You don't have to go back very far to see oil at $30.

Unless the economy turns around quickly, the demand for oil will continue to lag supplies. With contango narrowing, we'll see oil suddenly flowing in from off-shore tanker storage. And the lower oil prices go, the more incentive producing nations will have to cheat on their quotas.

The result will be an acceleration of price declines as speculators move out of the market.

Jul 08 05:24 PM

[OnMargin:]

I think the baby boomer commentors provide some interesting insight into the future psyche of the politician/ Washington/ FED. The baby boomers are going to pound the table that they deserve their payments as they paid into the system for years (see comments above). Baby boomers = powerful voters. Rather than discussing the merits of whether people should be entitled to their entitlements.... I rather bet on money printing and repayment of entitlement in "worth (space) less" dollars.

Long commodities long-term... I defer to RL on the short-term....

Jul 08 08:11 PM

[aaavoid:]

"It will be difficult for a lot of us "baby boomers" to stimulate the economy with oil at $75.00/barrel and prices at the pump around $3.00/gallon. "

Drive a fuel saving honda jazz instead of your lincoln navigator and your $3.00/gallon gas will look like $1.00/gallon gas as you triple your mileage per gallon. Stop being the typical american bratt who thinks it's our god-damn right to consume gas at $1.00/gallon all the time.

Why don't you look up how much the europeans are paying over there and you will feel blessed about our so-called "expensive $3.00/gallon gas"?

Jul 09 12:40 AM

[Jamaican in...:]

A war between the generations is what seems to be coming. As resources approach exhaustion, and there without a corresponding fall in demand then competition will drive up the price and force consumers to substitue the goods and services they desire for the ones that they can afford.
Boomers are carrying too much debt and the cathostrophic fall in American household wealth is creating a fiscal crisis for them. The WWII generation survived the great depression, defeated the Nazis and out maneuvered the Comminists after they were too old to fight them on the battlefield. That generation also realized that the boomers were idealists, who were quick to point out every American short-coming while they idolized dictators, petty revolutionaries and petty tyrants all around the world.
Boomers ignored international atrocities and demonstrated little concern about national priorities like national defense, maintaining the nation's manufacturing capacity, protecting the borders and the crime and decay that burdened our cities and forced working families to flee. Baby boomers amassed tremendous debt in order to buy the newest BMW and McMansion rather than exercise restraint creating an unsustainable situation and the current economic downturn is giving them a lesson.
Fuel prices will rise even if boomers desire clean energy, because solar and wind power will not in the near term meet their demand to power their MacMansions, heat their hot tubs or fill the gas tanks of the three cars that occupy their gararges. As the fall in their wealth becomes more apparent, the reality will force them to work longer because they have not demonstrated any willingness to curtail their demand for consumer goods that drive the demand for comodities like petroleum, metals and chemicals.
Maybe, in the short term there may be a fall in demand for oil (as unemployment grows, GDP stagnates and real per capita purchasing power falls) but in the long term, the baby boomers will continue to demand the things that they have always demanded thereby forcing up the prices of natural resorces like oil. The climb in oil prices back to $140 per barrel is inevitable, it is only a matter of time, unless the baby boomers change their habits.

Jul 09 06:40 AM

[BlueOkie:]

Social Security is a safety net not a retirement system. Try retiring on SS payments for any length of time. Reaching a certain age is not a right to retire. If you haven't saved or invested properly (and even if you have), you may need to work til you die.

Jul 09 07:04 AM

[Pax Americana:]

The American economic and cultural landscape, is resplendent with mirror images, of the fall of Rome......Read gibbons!

Jul 09 08:00 AM

[nobby73:]

What I believe, but is too terrifying for most US commentators is the world is soon going to return to strong growth, but leave the US lagging behind, as the US economy will not turn around strongly enough to keep the federal deficit under control.

Demand for oil will continue to grow in emerging economies as car ownership will rise and the price will continue. Those that have the oil see no reason to increase supply to keep prices low and neither will the required new fields come on line.

In my view, neither $40 nor $200 oil is "good" for the global economy, but I am highly doubtful we will see $40, and when we do see $200, it will be more a consequence of the decline of the Dollar.

Jul 09 08:56 AM

[cynewulf:]

These charts don't tell you as much as the author would like to think they do. He is misleading himself.

Jul 09 08:56 AM

[TradingHelp...:]

Agree. We will see $75-$80 before we see $40. For the reasons blu states and one other: China, which has again seen it's 2009/10 GDP growth estimates revised upwards. It's a machine driven by 1.5 billion people. You can't stop it.


On Jul 08 10:53 AM blu wrote:

> I'll go with Pickens... Those that have the oil determine the price.
> Saudi's and OPEC have said they like $75... They have the oil.

Jul 09 09:08 AM

[bricki:]

Either taxes or inflation (another form of taxation) are going to fund SS and Medicare. It's inevitable. Once you accept this reality the long term strategy for your portfolio is pretty easy to figure out.

On Jul 08 12:23 PM Relative Leverage wrote:

> With all due respect, TRIO, I don't think that you "baby boomers"
> are going to be stimulating the economy anytime soon. If anything,
> your "entitlement" generation is probably going to "stimulate" oil
> prices to $200/barrel (or higher). The government will continue
> to print money to fund the entitlement spending (Social Security
> and Medicare)...which will probably lead to the worst devaluation
> of the dollar that we have ever seen....and much higher commodity
> prices...

Jul 09 09:44 AM

[bricki:]

It's Gibbon, not Gibbons, and while he was an excellent writer and storyteller, his version of history is pretty dubious. To be fair he was writing in the 1770's; a lot more about Roman civilization has been learned in the ensuing 240 years.

One of the main criticisms of Gibbon is that he almost completely neglects the eastern part of the Roman empire that continued for 7 centuries after Rome ceased to be important.

So yes, read Gibbon for the entertainment, but then also read some modern work for a more complete picture.

Wikipedia is a reasonable starting point for references to this work.

en.wikipedia.org/wiki/...

On Jul 09 08:00 AM Pax Americana wrote:

> The American economic and cultural landscape, is resplendent with
> mirror images, of the fall of Rome......Read gibbons!

Jul 09 09:57 AM

[bricki:]

I'm a boomer, and the mix of a pension annuity, tax protected retirement accounts and the assets I inherited from my parents are shaping up to provide me with a pretty reasonable retirement. Social Security will be a welcome contribution to the whole picture, but I could do ok without it. Just not as winters in Hawaii, that is all. And my children will have a nice inheritance too.

Part of the is that my family has never been one to take on much debt so I didn't extend myself to buy a McMansion and a Lexus, and my kids were able to get through college without student loans. The result is my mortgage is paid off and I have zero debt.

Another part of that is that I don't pay much attention to financial hype, so I've avoided the trap of buying into bubbles at their peak and selling after they pop.

It is unfortunate that people don't get a better financial education. It is one of the most important tools in this day and age where individuals have to manage their money for long term goals.

And yes, I do feel that the 15% of my income that I have been paying into Social Security and Medicare over the 35 years I have been working should be repaid. When my parent's generation was retiring I didn't complain about my money going to fund their retirement, not to mention the huge military expenses of the cold war and paying off the huge debt left over from WWII.

After all that was supposed to be part of the deal; each generation fund's their parents Social Security and Medicare, and pays for the defense of the nation.

It is pretty disgusting to see the younger generations complaining about this. I continually hear about how the Boomers are the "Me" generation, but in reality it seems that X's and Y's are just as focused if not more so on "Me" than any generation that preceded them.

Fortunately there are a lot of Boomers, and they tend to vote a lot.

On Jul 08 09:00 PM ampsucker wrote:

> just to clarify: if you are a baby boomer, your money is long gone.
> robbed by the policitcal thiefs you voted for over the last 50 years.
>
>
> the money you are using now is coming from me and my generation (40
> year olds), the ones who still know how to and are willing to work.
> we're the ones depending on the gen xers and entitlement crowd coming
> up behind us.
>
> how about a little american anger, 60's hippie style, to get the
> government afraid of the people again instead of the other way round???
>
>
> amp

Jul 09 10:21 AM

[Canadian Re...:]

Social Security was in the hole right from Day One because the first group who received the money did not put much money into it. SS is always kept alive by the following generation.

The problem we have right now is we are not making enought babies. I think it used to be for every retiree there are 10 working stiffs putting money into SS, now it is more like 3-4 working stiffs to 1 retiree. One other problem is we are living longer. You combine the two, we have shortfalls in SS.

Boomer retirees, be prepared for benefit cuts. Generation X & Y, grin and bear it. We need your money as we cannot go back to our dearly departed parents to ask for our money back. Furthermore, if you still thinking of getting something out of SS when you retire, please hurry up and have more babies. That's why people have more babies in the good old days. It was another form of retirement planning.

Jul 09 12:08 PM

[long roh:]

Oil could touch $40 by year-end... it could also touch $80. There's too much volatility right now to be making short-term bets.

If we are still debating a third stimulus in the fall (i.e. if the gov't hasn't printed more money), the author might be right. If we are talking about whether there should be a fourth stimulus (i.e. the printing press is humming), the author will almost certainly be wrong. I would avoid betting on anything dependent on Congress.

Jul 09 01:05 PM

[Zachary Sch...:]

The recent weakness is likely due primarily to regulatory rhetoric as the CFTC threatens to curb speculation. While oil could certainly continue to drop as a function of weaker demand in a stubborn global recession, it will not likely reach the fear levels seen this spring. One of the main reasons is because we don't have nearly the amount of long exposure trapped in the markets. In mid to late 2008, nearly everyone who dabbled in the market had exposure to oil or some other energy investment. As the bubble burst, it caused excessive selling which the market could not absorb. I don't think there is the selling pressure today to drive the prices to that extreme low.

Zach
zachstocks.com

Jul 09 01:50 PM

[TurtleTrader72:]

Oil prices should find some strength as the US dollar loses value. From a technical perspective, the US dollar should continue its down trend over the coming weeks so this should sustain some higher prices in oil and commodities in general.

Jul 09 02:11 PM

[Macro_Man:]

I have been short for a while and unwound my positions over the last 3 days. I think oil may form a flag and try to reach up to 66. It is possible...I am bearish on equities, so I cannot reconcile my two opposing views at this stage..it is going to need some new flare up in Nigeria or some OPEC jaw-boning for both my views to be correct.

If oil forms a flag, then you are better off initiating your short at 66 and riding it all the way to 53.

If it doesn't then you miss only a few percentage points because there will be support at 58 or so.

I was short gold, silver and oil...i have been unwinding these positions and may shift that risk to short stocks...but am waiting for either the neckline to be broken or some new catalyst that can motivate me to short ahead of the neckline being broken

Jul 09 04:11 PM

[lbator:]

Don't write off oil yet. Eventaully the economy will improve and demand will increase. Exploration has greatley declined. Alternatives will eventaully lead to a long-term decrease in demand. However, there is no way this will happen to any point of significance prior to a recovery. We will see another bubble in the future. Not one fueled by speculation but one fueled by demand. I hope for the day we are not as dependent on oil. However, that will be after an increase in demand , not before. My money is on another oil bubble somewhere in the future. As I commented when everyone was selling off Ford at 2.50. Keep selling, because I'm buying.

Jul 09 06:27 PM

[G. L. Turner:]

Let's go back to Fundamentals, GUYS!

Remember last mid-spring in Congress, the top US OIL Execs adn Shell and BP US, testified that they were quite pleased with oil at $65...they coule drill and refine adn make money...OIL was @ $90-95 at the time, and climbing. (In later hearings, when the Reps really didn't want the Spot Limits and sunlight to fall on Gov Sachs' actions, they raised the price range to about $90..."cause of Iran tensions and the dollar".

60 to 90 days later, it was headed back to the $65 range...

The Saudis told Bush in January 2008, when oil was moving through $75 towards $90, (round 2), that he needed NOT to ask them to pump more - there was not a shortage! Rather, it was "OUR FINANCIAL SPECULATORS" that were driving the prices up...BUSH scoffed, and they rightly sent him home, empty-handed. You got that, the Saudis told us that we had already run the price up too much...adn that if we didn't turn the problem around, we were headed for a global recession (geez, how many times that I write that?) --- But, now, only housing could cause recessions....

Iran, Russia and Bush played a 'comment/speculation' game using 'threatening comments' on the world stage all spring, when things were quiet, CBNC, a shill for the Reps and GS/JPM, taking their cue from Gov Sachs, kept telling us the dollar was weak and that OIL needed to be higher. That China and India, who statistically did not 'move markets' were moving them in earth shakeningly ways...

So, we let these Greed Meisters wet the appetites of OPEC, Russia and Vene, and we trained them to like the taste of $75 - $80 OIL. So, now, by using our only tool - a torn and battered economy, can we wean them of those price ranges, and get the reality of $65 OIL back into the global economy...

When we stop letting those who 'control' without regrds to the damage their greed causes, we will see our economy rebound and prosperity return...In the meantime, it has/is relocating to the East!
GT

Jul 09 10:39 PM