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FOREX & FUTURES day & swing trader.
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  • Oil during Depressions 4 comments
    May 9, 2011 9:10 AM
    I want you to take a look at this chart of Oil during the Great Depression

    oil during great depression 1

    This is how it trades during such times, impulsive, one big retracement.            
    If current depression (Depression 2) has started, oil should behave the same way.
    This call is in sync with my dollar rise move.                                        

    If we try to find the target based on the Depression 1, the formula is simple:
    Great Depression 1's high: 3.07
    Great Depression 1's low:  0.27
    The percentage of the drop: 91%
    Great Depression 2's high: 147.50
    Great Depression 2's low: 147.50 * 9% = $13.27

    Channels 

    I have spent lots of time trying to fit oil's monthly chart into a symmetric channel but I couldn't until I found this one. It all makes sense now, check this out:
    Oil monthly channels
    I draw it on closing prices this time, so the lower line is now very well fitted. The upper line matches the closing prices too, almost perfectly. The lows and highs outside of the channel are of the same distance on both sides. This makes this month's high at 115 a perfect top. Now that we have the channel, what is going to be the bottom?
    My target is between 15 and 25,  most likely 18.50. I know Prechter called for 5   buck oil, but I am not going to wait for those extremes to happen. As we see on the Depression 1 chart, oil is volatile  and once the  bottom has been put, we aren't going to see low prices again, so folks, the last discount season on oil is coming and you don't want to miss it.


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Comments (4)
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  • chillNYC
    , contributor
    Comments (299) | Send Message
     
    Do you think the cost of production for a barrel of oil was different in 1931??? Do you think global demand and industrial capacity has changed since that time? How much has the global population increased since the depression? How much further does each barrel of oil need to travel to end users and how quickly must that transfer occur? The process has become far more complicated and much more expensive in the last 80 years.

     

    These are the costs within the price of each barrel of oil and remember that when oil is bought and consumed, it no longer exists in any useful form. Because of this you cannot chart oil prices like a long term S&P or Dow graph. It is a store-able, essential, finite, non-recyclable fuel product, not a stock or precious metal.

     

    The recent spike in oil has slowed the economy and pinched gasoline demand domestically. I expect the price of oil to pull back considerably but gradually. It is highly unlikely that the price will dip below $50/bbl in the foreseeable future.
    10 Jun 2011, 08:36 PM Reply Like
  • ker.nulov@gmail.com
    , contributor
    Comments (662) | Send Message
     
    Author’s reply » "Do you think the cost of production for a barrel of oil was different in 1931??? Do you think global demand and industrial capacity has changed since that time? How much has the global population increased since the depression? How much further does each barrel of oil need to travel to end users and how quickly must that transfer occur? "
    yes, today's details are not the same as 80 years ago. But depressions move in similar way and they ignore fundamentals. Also if the dollar rises market will have to reprice oil. This will not affect oil's value but in nominal terms if you hold oil in dollars you will be down. Many oil analysts only check demand and supply issues but they don't look at the movement of the currencies.
    11 Jun 2011, 12:15 PM Reply Like
  • chillNYC
    , contributor
    Comments (299) | Send Message
     
    I think you are looking at two very different issues here. First is the relationship between spot oil prices and the dollar. Recently, the short term correlation has distorted the long term independence between the two. The best example would be the 2 year period from 1999 through the end of 2000.

     

    The dollar index opened at 93.00 in 1999 and rallied for 2 full years, closing out 2000 at 118.00. This was the dollars strongest period in recent history. Crude Oil traded at $12.00/bbl in January of 1999. Crude Oil rallied right through the end of that period, trading $35.00/bbl by the end of 2000. In 2001 and 2002, the dollar weakened substantially yet price of oil collapsed back under $20.00/bbl despite this. During 2005 and 2006, the dollar strengthened as the Fed raised interest rates from historically low levels. The stronger dollar did not stop oil prices from setting record highs of $65 and $75 per barrel in those years.

     

    In order for oil prices to fall as low as you are suggesting, 1930's style deflation would most certainly need to take place. This broad based price deflation made the Great Depression unique to any other economic downturn in this countries history. This spiral was caused by the supply of money shrinking rapidly and the central bank raising rates at a time when credit was needed more than ever. Regardless of how anyone may feel about it, the Fed has not allowed the supply of money to shrink in the financial system making this period unlike the 30's. The money in the system insures that commercial users of oil have the cash to pay $100 per barrel or whatever the price of oil may be.

     

    14 Jun 2011, 06:27 PM Reply Like
  • ker.nulov@gmail.com
    , contributor
    Comments (662) | Send Message
     
    Author’s reply » " The stronger dollar did not stop oil prices from setting record highs of $65 and $75 per barrel in those years."
    well, I don't know about that. maybe the dollar was lagging for 2 years and this is why we got such a wild bear market on it.
    "In order for oil prices to fall as low as you are suggesting, 1930's style deflation would most certainly need to take place"
    but this almost happened in 2008. if it dropped to 32.50 and the crisis was not yet fully developed imagine what's the price will be when the Europe will be at the border of disintegration, the dollar at around 130 on the index and businesses cutting costs at full scale. In a strong bull market you don't have a price drop of 80%
    15 Jun 2011, 06:00 AM Reply Like
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