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The Long Case For IPath S&P Crude Oil Total Return Index ETN

Oil Prices Expected To Sink To New Lows

In exactly one decade oil prices rose from $20 a barrel to roughly $100, with spikes of $134 in 2008 while the recession brought it at $40 for a brief period of time. Over the last couple of days the prices have headed down and many conclude that this is the direct effect of an increasingly stronger US dollar. There is a correlation between the fact that EUR/USD pair also sank below 1.30 but there are some who speculate that the price of oil is going to head into one direction: downwards.

Oil Production Increases, Demand Drops

From 1985 to 2001 the prices of oil revolved closely around the value of $20 per barrel despite the fact that oil production increased at a steady pace. It is not only the drilling performance that improved, but also the production of oil after the drilling declined. After oil fields are discovered, companies prefer to decrease the drilling activity because they still make enough money without taking any chances. The fear of a potential oil peak led to occasional spikes in oil prices with the historic highs recorded back in 2008.

Now that new fields are being identified and shale gas is picking up traction, oil companies are no longer uncertain about what the future will bring. They now facing a different challenge, the one of keeping the prices high enough to maximize their revenue, without alienating the few existing customers. They can't afford to increase production even though they have plenty of oil to extract, because demand is weak.

Demand for Oil Grows Slower Than the Economy

The major economies are no longer concerned about an imminent meltdown, with both the Euro zone and the American economy returning to growth. The problem is that the numbers are downright insignificant and this progress, can't diverge attention from the fact that emerging economies are growing at a slower pace. BRIC countries were recently the ones driving the prices upwards, while traditionally demanding economies such as the European and American ones stagnated. Oil prices could only surge if these consumers would miraculously recover and this is not something that investors should count on.

At the current growth rate, the impact on oil prices is insignificant and consumer sentiment is right now a stronger factor that dictates the price. Existing wells have a better output and oil companies extract sufficient oil from existing ones to be less concerned about the costs of exploring new fields. Overall, there is no reason to expect a rebound in oil prices anytime soon, so binary options traders should be undeterred in their decision of purchasing put options with a distant expiration date. It is not far-fetched to expect oil prices to sink below the psychological threshold of $80 per barrel by the end of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.