How Far Could Oil Prices Fall? 24 comments
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By now, everyone should realize that oil prices are determining monetary policy. This is true for the US as well as other central banks around the world. Central bankers have been very worried about price pressures and we know that most of the pressure comes from oil.
Oil prices are impacting not only monetary policy, but also stocks and the US dollar. The rebound in oil prices today and geopolitical tensions are driving the US dollar lower. Iran reportedly test fired 9 missiles in the Persian Gulf and according to the Associated Press, the missiles could reach Israel, Turkey, the Arabian peninsula, Afghanistan and Pakistan.
These geopolitical tensions will probably ease as Iran’s test fires prove to be nothing than muscle-flexing. At that time, oil prices will continue to fall. Speculators are driving the move in oil prices and if the selling exacerbates, these traders will be quick to abandon their long positions. Yesterday’s drop in crude was the largest since 1991, but we could see another $10 drop before prices hit a bottom.
As indicated in the following oil chart, prices started to really take off in 2006. The move however has not been vertical. Between 2005 and 2008 there have been many corrections and on average, the corrections have ranged between 10 and 15 percent.
The second chart gives a closer look of the price action in oil over the past year. Even though crude hit an all time high of $145.85 on July 3rd, that was not before a series of retracements.
Therefore another $10 drop in oil prices is feasible even if oil remains within an overall uptrend and that would be bullish for the US dollar (Q3 Outlook for US Dollar).
Source: Bloomberg
Source: Bloomberg
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While speculators share part of the blame for the run-up in prices, it's an exceptionally small part. The supply of light sweet crude just simply isn't what it used to be - we're resorting to heavier, dirtier oil that is costlier to refine.
What I think has done the most damage is our idiotic Federal Reserve - they've weakened the dollar to the breaking point. Greenspan flooded the economy with cheap money for years to try and stave off a recession. This was monumentally stupid - corrections are a necessary part of the economic cycle, and now we're in a situation where we are worse off than if the Fed had just let a drop happen. I wish they'd just raise interest rates already and quit being cowards. The economy is already messed up, and a rate hike would be a short-term pain that would ultimately end up making us better off. But Bernanke will never do it. The 2% will stay the same at the next meeting.
At this point, I'm more worried about a situation where we have 10 years of pain like Japan did than a market crash. I would much rather see a quick crash and ensuing recovery than the prolonged beating we're taking every day right now.
I think oil will continue to go up past $150 by the end of August.
We have seen a parabolic rise. Correct. However, a correction of the oil price towards the bottom of its secular uptrend, would only bring it down to $ 120 and a correction towards the base where the parabolic rise started from, would only take the oil price back to about $ 100 per barrel....still more than double compared to the $ 40 and $ 20 we were used to.
shareholdersunite.com/...
Just sent my petition email "stop oil speculation" to our senators. This is going to be big.
A ten year chart of oil looks just like the Nasdaq in 2000, Japan in 1989 and Gold in 1980. Each of them ran for about 7 years and went up a few times. Oil's move is a bit longer and bigger than the others. Each of them had good reasons to be up there are the peak.
Certainly there should be some demand destruction at $140 and above that should start kicking in...
Too bad you couldn't mobilize people to do that.
They'd prefer to drive around in their SUV's instead.
Pity.
The same may apply to oil. The shear variety and volume of people weighing in on oil may act as a contrarian indicator meaning it's due for a correction. Seems dollar positive.
The high price of oil has left that bad taste and people are going to remember that even when the price of oil reaches 110 a barrel. Demand destruction has already happened. People are installing more fuel efficient boilers that will pay for themselves in a year or two. SUV sales have plummeted. The Saudi's have sold August oil a few dollars lower than what the market was willing to bear. It's not like the 70's here where oil rationing was going on, but that's happening elsewhere in the world (nothing's in our backyard anymore not even protest). 200 dollar oil.... my ars... and i'll take that to the bank.
These posts show how little most people know about the workings of our global economic systems. Ms. Lien, Shareholder's Unite, Glacier and Coelacanth seemed to have sniffed something out here. The rest of you are so caught up with what you THINK you know that you've become unable to ingest unfamiliar ideas that might possibly point you toward some good trades.
In between propose solutions! I submitted plan to the Administration back in March on energy independence and job creation for the 49% GDP of small businesses getting creamed and now dragging down Wall St.
For this group here at Seeking Alpha, we could change our government by creating a fund to elect educated Patriots that want to serve outside of the RNC or DNC funding machines which has politicians agenda's set before they enter office. Guys want to serve but can't take a year off to run so we keep getting spoiled, ivory tower Harvard lawyers types into Washington.
So some of you will have to put your money where your mouth is on such a fund when those of us have polished the plan. I have the technology and media piece and have begun working with other guys on this effort (along with the 14 hour days on my Consumer Health/Tech business). This vision is a business opportunity, because those whom ultimately influence and control our government will call the shots. So I am long on America but I am not fleeing even though I have the means to do so.
However, Oil is LIMITED in SUPPLY. simple. We will see increases when Iraq comes into play, coastlines, coal to liquid, hell maybe algae will fix the whole problem.
But for now, right now, Oil is quite probably going to at least 160 this year with equivalent disruptions in indexes heavily dependent on petroleum products (Dow first, NASDAQ later...any thoughts?)
Why do so few think about supply and demand when it comes to Oil?
To say oil prices are determining monetary policy, after 15 years of poor US monetary policy setting the stage for this, is a joke. Its like a spouse who had an affair for 15 years getting mad their significant other cheated.