So what now for the oil price?
Credit concerns have caused a global market correction and all the talk now is of a slowdown in the global economy. This is the main reason why the oil price has retreated recently from highs of $78 a barrel to $72. I have even had a conversation with someone that has predicted oil will plunge to $50 as the economic slowdown continues.
There really is no shortage of doomsters at the moment.
I received an email off a chartist friend of mine on Tuesday in which he was predicting something that resembled Armageddon. He argued that the Dow was in the same pattern it was before the 1929 crash that lead to the great depression. He was convinced that history was about to be repeated.
Of course, if my chartist is correct, oil certainly will plunge if we enter a global recession, but I am sceptical that this will happen. All these things are certainly possible – but the question is; are they probable?
When you push all your assumptions in a model to extremes then you will certainly get an extreme point of view.
So, I’m still not heading to Argentina
Because of all the uncertainty, oil traders have been turning more bearish; but is this correct? I am not so sure. In fact, I’ve managed to find myself in agreement with the king of the oil nutters himself – Hugo Chavez.
The Venezuelan egotist predicted that oil would hit $100 in a televised speech he gave to the nation on Saturday. He exclaimed the prediction with glee as he entertained Caribbean leaders in Caracas.
So, who is right? The red corner team consisting of myself and Looney Chavez; or the blue corner team represented by my chartist correspondent and the speculators that have been responsible for the recent sell off.
I believe that, ultimately, Hugo and I will be the ones that are proved right. Global financial markets have survived worse shocks than the unravelling of the US sub-prime mortgage market. Indeed, the very fact that it has unravelled is a positive for the market going forward. The lending was stupid and shouldn’t have happened in the first place.
I believe oil is going to $100 dollars; probably not this year, but we should hit this level somewhere in 2008.
Recent falls were precipitated by fears of a rapid economic slowdown, which would dampen demand. This is just a mirage. Demand is not going to plunge and supply remains extremely tight.
Despite the market shakeout, Opec upped its estimate of demand for next quarter and 2008 by 200,000 barrels a day. Its statement said: “World gross domestic product remains on course this year and next despite financial market turbulence.”
Pearls on Dean
Then there’s the hurricane season. After a pregnant pause, Tropical Storm Dean has made an appearance. The storm season is getting into full swing. On Tuesday, Royal Dutch Shell became the first major to close down part of its operations in the Gulf of Mexico on fears that Dean will become a full hurricane by the weekend.
Royal Dutch Shell will evacuate a further 100 non-essential staff from the Gulf on Wednesday after bringing back 88 on Tuesday. You should not underestimate the implications of the storm season.
Also supportive to the oil price are falling US oil stocks. Data released later today from the US Department of Energy is expected to confirm that oil stocks fell by 2.5 million barrels in the week ended 10 August, according to a consensus view. Gasoline inventories are forecast to fall by 750,000 barrels from 203 million barrels last week.
So, the situation appears pretty clear: if you think we are heading into a global recession then the oil price is likely to fall. If you think the world is going to continue to plod along with minimal growth in western economies and stunning growth in the Asian emerging markets then you should expect the price to soar.
As for my chartist in the blue corner predicting a 1929-style crash, I’ve sent him a bottle of Rescue Remedy. It’s supposed to cheer him up…
By Garry White for his ‘Garry Writes’ newsletter. To find out more about his monthly newsletter, Outstanding Investments, which expands on his views and makes specific recommendations in the resource, infrastructure and biotech sectors, click here: Outstanding Investments
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