Oil prices are a hot topic right now.
Crude prices have fallen to their lowest level in 27 months.
Perhaps the biggest beneficiary of falling oil price will be the Hummer. Bloomberg View reckon lower petrol prices will see the Hummer comeback. Nothing says money like a car that chews 24 liters per 100 km in the city streets.
On the serious side, the lower oil prices are starting to cause problems for crude producing nations.
The International Energy Agency cut its oil growth forecast for 2015. The IEA believe oil demand will only increase by 1.1 million barrels per day to 93.50 million next year.
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Demand is shrinking and countries like Saudi Arabia are continuing to produce oil at the same rate. The falling price and increasing supplies are putting pressure on oil producing nations.
Take Venezuela for example. Oil exports account for more than 50% of the country’s GDP.
Forbes recently wrote that the fall in oil prices may see Venezuela default on its debt.
‘When Venezuela last week demanded an emergency Opec meeting to try to stop the fall in energy prices, it was not the socialist country’s peers in the oil-producing cartel that paid attention but rather its increasingly worried bond investors on Wall St.
‘“It is the question that I am being constantly asked; at what oil price can Venezuela no longer pay [its debts]?” said Francisco Rodríguez, senior economist at Bank of America Merrill Lynch.’
CNBC says Saudi Arabia is desperate to remain a key oil supplier to the US.
‘Saudi Arabia continues to pump oil instead of cut production, and … they will keep on pumping away to take a price hit right now in order to drive down oil prices so that the U.S doesn’t become energy independent.’
However, that might not matter. As the Financial Times mentioned this week, America’s ‘break even’ price might be lower than the Saudi’s can handle.
‘…the tremendous growth of US oil output. Production is getting less costly every year and break-even costs are plummeting to much lower levels than commonly believed, certainly lower than $75 per barrel.’
There’s more to the low oil prices than excess supply, defaulting countries and a military-turned-civilian-car flooding the ‘burbs.
The Saudi’s are trying to keep America dependent on its oil, but there’s also a power play to keep America on the Saudis’ political good side.
Editor of Sound Money. Sound Investments. Greg Canavan mentioned the power struggle this week to Money Morning readers. The Saudi government quietly confirmed they will accept around US$90 — or even as low as US$80 — per barrel for their oil for as long as the next two years.
As Greg wrote:
‘It seems more likely that Saudi Arabia wants to pressure other energy producers (like Iran and Russia) whose budgets rely on US$100-plus per barrel oil prices.
‘Russia, as a major commodity producer, will be under the pump while energy prices and other commodities remain in a slump.
‘Which is the whole point. The US is trying to weaken Russia economically, and lowering oil prices is a good way to do it.’
In spite of the geopolitical tensions, one analyst reckons oil is about to find it’s bottom price in the market, bounce and then trade much higher.
Diggers & Drillers resource analyst Jason Stevenson reckons oil prices could be only a couple of weeks from the lowest point for the year.
To prove his point, he sent me the chart below.
Oil Spot Price 2005–2014
Source: freestockcharts.com
Currently oil is trading around US$81 per barrel.
Looking at this chart, Jason has two tools that tell him why the price won’t head much lower.
The first is the momentum indicator at the bottom of the chart. This stochastic indicator suggests oil has been oversold and is plateauing.
If you look closely, you can see the oil price is heading for the dotted line. This dotted line is the 61.87% Fibonacci ratio, which equals US$77.40 per barrel.
In the past, the 61.8% ratio has acted as both support and resistance to the price.
From 2005 to 2011, this ratio proved to be a major resistance line for oil. Excluding 2008, the oil price could not rise above this level!
However, from January 2011, when the oil price pushed past it, it has become a support for the oil price. It keeps bouncing off this level.
In the coming weeks, Jason reckons this support line will be tested again.
Jason tells me the oil price could bounce off this level again. This has happened three times since 2011. Each time, oil has tested the support line and rallied higher. He see’s oil quickly moving up to US$100 per barrel again.
But Jason says that if the oil price goes below this level, it won’t be there for long. This is because Saudi Arabia is artificially keeping prices lower, and this won’t happen for long.
Jason reckons it’s when American military boots start hitting the ground in Iraq — and Syria shortly after — that is the key moment for the oil price rebound.
Before that happens, don’t ignore the investment opportunities in oil. Jason tells me the low commodity prices and stocks are ‘a gift’ for those who invest now. It’s best, he says, not to get caught up in the ultra-short term price fall of oil.
‘These sorts of buying opportunities don’t come very often. We will look back next year as this point in as the chance to buy oil stocks at the bottom.’
Jason is confident that this is the chance to profit from oil stocks, he has a special report prepared for you about the next ‘wildcat’ opportunity. Keep an eye on your inbox; you should receive it in the next two hours.
Shae Smith+
Editor, Money Weekend
The post The Technical Support for Oil appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
