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Crude Bulls and Oil Price Bears Both Have a Point – But Who is Right?

With compelling arguments each way, wise move may be to sit tight


Predicting crude oil prices, or any commodities for that matter, is no easy task. Two of the biggest and smartest hedge fund managers have a disagreement on gold (and therefore on inflation). George Soros sold the bulk of his gold holdings while John Paulson doubled down on his.

Just as these titans disagree on gold, I have rarely seen as much disagreement on the future direction of crude oil prices (and therefore by default on inflation). In today’s oil price review let’s analyze both arguments and my conclusions on crude prices:

The Bullish Argument for Crude Oil Prices

  • Goldman Sachs has turned bullish, looking for another $15/barrel price rise by year end.
  • Morgan Stanley has turned bullish on all commodities saying “the correction is over”
  • Libyan production remains down by 1.5 million barrels a day compared with pre-crisis oil output
  • OPEC has shown they have not been able to make up for this lost production with their spare capacity
  • OPEC will not raise their production quotas at their June meeting

The Bullish Argument for Crude Oil Prices

  • Goldman is good, but history has shown they are not always right.
  • Morgan Stanley is not always right.
  • Economic growth is slowing (as evidenced by a downward sloping stock market, at least in the short term). In fact Goldman has cut their growth forecast for China — and how can they be bullish oil if growth is slowing both here and in China?
  • Highway travel declined 1.4% last month due to high gasoline prices.
  • OPEC will raise their production quotas at their June meeting (it just depends on who you want to believe)

The past few weeks have seen the oil market in a sideways trading range between about $95 on the low side and $101 on the upper band. The breakout from this band (either direction) will give us a strong clue as to the next big move.

If the oil market can break and close below $95/barrel, I would see this to be weak action and look for continued weakness to at least the upper eighties. My bias anticipates at some point a breakout above the highs with an eventual move back to $115 by year end.

The bottom line is supply vs. demand remains in a very precarious balance. The world produces just over 80 million barrels/day and consumes what it produces. With supply down it would just take a marginal additional supply disruption anywhere in the world (and/or a marginal uptick in demand) for this to occur.

However, prudence is telling me to watch the market action, wait, and let the market show it’s hand before entering a new position.

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: Phone 800-233-4445

Special LA based seminar in June: George is hosting a live seminar in LA with two other master traders. Get the details here!

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