Monday, 20 July 2015

When Will the Price of Crude Oil Recover?

A 6 million dollar question.

First off, there's little doubt that OPEC (with the Saudis' lead) are manipulated this whole drop in price of crude. There's no question about this because their production numbers are still high, and they could lower their production anytime they choose to get the price of oil back up. That's what the oil cartel does. They control prices.

5 year chart of OPEC crude oil production

Why do they want a lower price of oil? I looked at a few reasons for the crude oil price decline here.

The thing is, this could only be a short term measure, a long term of depressing the price of oil is tantamount to economic suicide for OPEC countries (OK, "suicide" maybe too strong, "disadvantage" would be more moderate). This is obviously not their intention to stay low forever. Sooner or later, they have to let the price of oil rise again.

How soon? Let's look at the following scenario.

4 year WTI Nymex crude oil chart

From a technical point of view, after a precipitous fall from middle of 2014, one MUST expect a dead-cat bounce. We had that from April to June 2015, soon after the price plunge.

This is a tradable bounce, but I'm not interested in a nimble trade. I'm a contrarian investor who's more interested in a more sustained rally over a longer period like a year or two, and beyond.

So I'm waiting for a retest after the dead-cat bounce. The retest of the Jan and March lows (around mid $40 / barrel for WTI) will happen this week or next. Will it hold? That's the question, isn't it? If it does hold, this will lead to the more sustained rally I've been waiting for.

From fundamental point of view, the successful retest suggests that this is OPEC's price floor.

I say it would likely hold. And if it shows to be the case (and we won't have to wait too long), it's good time to get into oil for those with a longer timeframe.

I'm not suggesting that the price of oil will shoot up after the retest. I don't expect a "V" shape recovery. It would probably be followed by a period of consolidation before the rally can take place in earnest. It's safer to be standing on the floor. Let the price action tells us where the floor is.

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