Crude oil prices are volatile right now, amid crosscurrents, conflicting fundamentals, and dealing with “the unknown.” For crude futures, this is currently the normal environment in which we traders attempt to determine the future price of oil. One could easily make a bullish case or a bearish case for crude oil prices , each certainly with profound investment ramifications. But which is the more compelling argument now?
The bull case is centered around crude oil supply. There is only so much supply available to the world on a daily basis in the “perfect” scenario; currently about 86 to 87 million barrels per day. Some capacity is lost every day and some is gained, but big gains cannot take place overnight without takes time and money. On the other hand, big losses in crude oil supply can take place in no time at all and are generally unexpectedly. Libya comes to mind here.
Middle East strife is a way of life these days, and it is not going away anytime soon. In fact, it could last for years in various oil producing countries, and if it hits a big one (Saudi Arabia?) oil prices will spike overnight. As long as the political situation in the Middle East remains unsettled, there will be a bid under oil prices — particularly at the daily close of trading and Friday afternoons. After all, who wants to be caught short on crude oil prices if something happens over the weekend?
Today, the bear case for crude oil is centered around demand. The Japanese tragedy will no doubt affect global economic growth. Growth seems to be slowing in China as well, and even a small drop in demand (as little as 500,000 barrels/day) can cause an oversupply at the margins to count for a quick $5 to $10 price drop per barrel.
So which is a more compelling argument?In my mind, they are both valid in the short run. But in the longer term the bull case should prevail.
Over time demand for crude oil is set to grow faster than supply, the nearer term demand drop is a temporary phenomena. In fact, the Japanese tragedy will at some point stimulate oil demand as they rebuild. Add the element of a declining dollar (which makes oil pricier in dollar terms) and the path of least resistance points northward. Bottom line, with oil at $104-105, and the demand-depressing news already built into this price, my bet is oil breaks above $110 before it breaks back under $100.
However, if — and only if — the market were able to break and close back below 102 that would look negative on the charts, at least in the short run.
George Kleinman is President of the Lake Tahoe based commodity advisory and trading firm Commodity Resource. He trades oil (and other commodities) for himself and his clients. If you are interested in having George trade for you, email him for additional information. Email: firstname.lastname@example.org. Phone 800-233-4445.