Oil Prices To Fall Further Despite Production Cuts

| October 24, 2008

Did you see the news today about OPEC?  We’re entering a global recession, and they cut oil production by 1.5 million barrels a day.  OPEC (Organization of Petroleum Exporting Countries) for those of you who don’t know is a global cartel of oil producing nations who meet regularly to set production levels.  They have the power to influence the global economy, and here they are doing it again.

It’s not the first time.

Every time OPEC decides to adjust oil production levels the impact ripples through the economy.  Back in May I penned an article called Gas over $8 a Gallon?  At the time, oil had just surged past $120 a barrel and it wasn’t going to stop any time soon.  President Bush was begging Saudi Arabia (and the rest of OPEC) to produce more oil.

Goldman Sachs had just put out a research note calling for oil at $150.

Other issues were also driving up oil prices.  Nigeria was having problems with anti government groups threatening oil production.  (I’m sure they’re still having problems but it doesn’t make the news anymore.)  At the time Iran was saber rattling and creating a problem on the world stage (what’s new?).

Gas prices were up over $3.75 and heading towards $4.  And oil prices were so high, Congress started investigating the oil markets.

Consumption of oil was driving the markets at the time.

But right now oil prices are falling.  We’re down more than 50% from the high, and we keep falling.  So, back to OPEC.  Today they announced major production cuts.  Anyone with half a brain would tell you that if supply is cut back, prices should go up.  But they didn’t go up!  They actually fell – as I’m writing oil prices are off more than $2.

This is an amazing sign.

This is a flashing beacon, we need to pay attention to.  This little data point tells me we’re not in normal times.  It means oil supply is falling, but oil demand is falling even faster.  We are seeing the start of a global recession.

Take a moment and look around the globe.  You’ll find country after country, economy after economy being flushed down the drain.  Hot, high growth countries like China are slowing.  Huge stable countries like Japan are shrinking.  And the US is teetering on the edge of recession.

All this economic turmoil is causing demand for oil to fall.

As an economy slows or contracts, the demand for oil and other commodities falls.  It’s a cycle we’ve seen before.  But I’m not the only one thinking this.

Just a few days ago I shared a glass of wine with a good friend.  This friend is no ordinary individual.  He’s a venture capitalist focused on the Alternative Energy industry.  He knows about cutting edge energy technologies that will cut our dependence on oil.  Because of his job, he also has an incredible grasp on energy policies and of course the energy markets.

He told me his investments assume oil at $30 a barrel.  I had to ask him to repeat what he said.  I couldn’t believe it.  Oil around $30 a barrel!?! We’re over $60 – now.  That means oil’s going to get cut in half again.  I knew oil was going to fall further, but that’s a huge drop.

The more I thought about oil prices, the economy, and global consumption, I realized oil is going to fall.  Will it hit $30?  I don’t know. But at $60 it’s way over priced.  This tells me if you aren’t already profiting from the fall in oil prices, there’s still time.

Just this morning I sent a trade alert to the subscribers of my Elite Option Trader service.  I showed them how to profit from a further fall in oil.  Just as an aside, the last oil related trade I recommended ran up 766% at peak value.  Now I’d like to tell you about the trade, but that wouldn’t be fair to my paying subscribers.

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Category: Commodities

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