Did You Say… ‘Oil’?
H/t to C.Prez
Dr. Joe Duarte explores the “oil top” and wonders: Is this the big one?
After a 16% decline in the price of crude oil and a 14% decline in overall commodity prices, as measured by the CRB Index, questions are rising about the status of the secular bull market in commodities.
The fact is that although no one wants to say it, it is possible that we may have seen a long-term top in the price of crude oil. The problem with making any such claims, is that it’s nearly impossible to make such assessments without having at last several weeks, and sometimes months worth of evidence.
The top of the dot.com bubble took months to become clearly evident, although the losses were already significant by the time the trend was already established.
The technical evidence at the current time in the oil markets, though, suggests that something is ongoing, as the 200 day moving average, the line that divides long term up trends and down trends is being tested on key major commodity stock indexes, as well as futures contracts.
For example, stocks like Halliburton and Schlumberger (see our Market Moves section below) have been in major and very aggressive down trends for some time.
Both are key components of the Philadelphia Oil Service Index (OSX, see chart below in our oil and energy section), which has collapsed over the last few days.
Gold prices have also taken a hit recently, with the $600 area now being tested, and breached on 9-11, although prices rose back above the key benchmark overnight.
There are many reasons for a significant pull back in commodities.
First, oil prices have been on the rise since the 9/11 attack in 2001, with nearly a non-stop bull run during the period.
Second, the Federal Reserve has raised interest rates four fold over the last several years after taking the Fed Funds to 1% after the 9/11 attacks.
And third, there are now clear signs that the U.S. economy is starting to slow down, as housing prices fall, and thus the borrowing power of home equity is starting to fade.
He goes on to explain that ” the decline in oil, and thus commodity prices, at this point, is more due to a fall in demand, than to an oversupply.”
Another potential problem, obstacle is that ” investment in alternative energy remains significantly below what it should be.”
Just about every person in the West, be it either in the US or in Europe, seems to agree that more should be invested in (finding and developing) alternative energy, yet… just about every single country fails to do what’s necessary to develop / produce them on a significant scale.
If Western countries want to become less dependent on other, non-Western countries, alternative energy is one of the major keys of accomplishing it.
Lastly, he emphasises that successful attacks, carried out by Al Qaida, against oil installations in the Gulf, will also greatly influence the prices:
[D]espite calls for a complete collapse in oil prices, if Al Qaeda has one success, even if it is relatively minor, against an oil installation, the oil market’s conclusion that there is little threat to prices from terrorism will have to be re-evaluated. Most likely, from a price standpoint, the re-evaluation will be most unpleasant, for consumers, oil companies, and short sellers.
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9 Responses to “Did You Say… ‘Oil’?”
Well, we are somewhere around the Hubbert Peak so in what I would call the long term (say 5-10 years) supply will take a bit of a hit. During that time, I see no real hope that demand in this country, China, or India will change.
We might see gas prices stay low for a year, or even 2, but then it will steadily climb until we find an alternative energy source.
Guess it all comes down to what you call ‘long term’.
Interesting. I thought they just discovered some new reserve in the Gulf of Mexico. I have heard others say that drop in demand has led to price drops recently.
Elrod,
There was also a 6.0 magnitude earthquake in the gulf a week or so ago:
Gulf of Mexico earthquake felt in Southeast US
BTW Financial Sense Online, Stormwatch, and Peakoil.com are my “Go To” resources for financial and energy news.
I would say: let’s wait for Winter and then judge the situation afterwards. As far as sxome other commodities are concerned, the bull market is not over. Precious metals will continue to climb far into the next decade. Not only because of demand outweighing supply, but mainly because of inflation.
In the short term, the oil price has its effect on the prices of precious metals but in the long term they do not necessarily have to move up or down together. I would agree that now is not a good time to buy oil-related stocks (I obviously have my money in mining funds) for the longer term, but for the coming three months there’s definitely some potential. Energy demand always increases during Winter months and oil is simply oversold. Do not forget the influence of hedge funds. Commodity prices are no longer pure reflections of supply vs demand as hedge funds play an increasing role in prices moving up or down.
Joey, good comment. I assume that you are an active participant on the stock market (instead of letting someone else invest for you)?
Joey or C. Prez,
I thought there were a few other factors that also affected the oil price and by its nature gas prices. I thought that the summer mix cost more to make, therefore was more expensive. and I also thought that the driving season usually ended around Labor day.
My assumption is that demand has gone down some, I could be wrong though. But I had always been under the impression that the summer months demand was higher for gas and therefore higher demand on oil as well.
C. Prez,
What did the earthquake have to do w/ the oil reserve discovery? I read that those reserves are 4 years away from truly being available, about the same time another well will be empty. And it will be considerably more expensive to mine due to its depth under the ocean floor and the type of oil it is will increase refinery costs.
It means now that the tensions within the Earth’s crust have been released, the oil companies will have that much longer to pump in peace and quiet.
Or, maybe it has no relevant meaning at all, other than to say that the Gulf has earthquakes just like the rest of the planet.
Michael, I have part of my money in funds (thus letting the banks choose how to invest in my chosen serctors) and part of my money in mining companies. I also play with options now and then but that’s always a casino.
JimB, all buildings and houses need to be heated up during Winter, thus consuming more energy. It’s as simple as that. The US hurricane season does play a significant role too, though. As we saw last year. There’s dozens if not hundreds of factors that have its infuence on the oil and gas prices. Most importantly, the political situation in oil-producing countries has its effect. And seeing the current oil price, there are apparently no terrorism threats, no problems in Iraq and Iran, no threats in Nigeria and Venezuela… well, you get my drift.