Which Way Are Oil Prices Headed?

| December 1, 2008 | 0 Comments

Just two weeks ago I wrote about falling oil prices.  Gas prices had crashed below the $2 mark.  Oil was trading below $50 a barrel for the first time in months.  The inflation threat which built all summer long has disappeared.  Now the big concern is deflation and the global economic slowdown.

Believe it or not, the global economy is going to impact oil prices more than anything else.

Oil producing nations and OPEC are concerned oil prices are too low. They’re trying to artificially prop up prices by cutting supply.  It doesn’t matter how they play with supply.  The economic slowdown is stifling demand.

Long term, oil prices are heading higher.

But for now, they’re going to trend lower… much lower.

OPEC had a big meeting in Cairo this weekend.  It was an unofficial event.  Yet many traders assumed they’d announce another cut in production.  That’s why oil traded up from $49 to just over $55 last week.

There wasn’t a production cut, but tension is apparently forming in the cartel.

The Saudi Oil Minister noted it was “too early” to make another output cut.  Remember it was only a few weeks ago, in late October, when output was cut by 1.5 million barrels a day.

But the Iranian Oil Minister had a different take.  He announced on state TV OPEC would look to cut production in December by 1 to 1.5 million barrels a day.  He wanted to “restore oil prices to $90 per barrel.”

Oil prices traded lower on the news… significantly lower.  Cuts in oil production won’t matter for some time.

Why the disconnect?

It’s the economy.  Economic news from the EuroZone, Great Britain, and China is depressing.  According to China Daily News the Purchasing Managers’ Index (PMI) for China’s manufacturing sector dropped 5.8 percentage points during the month.

It’s the lowest the Index has ever been since China’s National Bureau of Statistics started tracking it in 2005.

What’s it mean?  It means China’s economy is slowing.  That means production is falling, growth is falling, economic demand is wavering.  One of the fastest growing consumers of oil is now facing a slow down… and that means oil consumption is slowing as well.

Clearly a global fall in demand is driving prices lower… with falling demand OPECs production cuts will do little to stem the fall of oil.

Now before we throw OPEC entirely under the bus, let’s look at the US. According to World Oil’s November journal September oil production here in the US was down as well.  Total production fell 17%, partially because of hurricanes, but also because of falling demand.

So, let’s look at the entire picture.  Global economies are slowing, even China.  OPEC’s cutting production and probably will again.  And, to top it off, US production is falling as well.  Yet, oil prices are still falling.

All of this tells me oil’s heading lower short-term.  I think oil will fall as low as $40 or maybe even $30 a barrel before rebounding.  If you want to profit from this fall, look at some of the ETF’s tracking the price of oil.  UltraShort Oil & Gas ProShares (DUG) is a perfect way to profit.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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