Oil Prices Set to Crash

Oil Prices Set to Crash

By: Michael Molman

As stock markets around the world continue to experience record low volatility, commodities remain volatile as ever. One commodity has been making headlines with its constant wild swings, oil. It is no secret that oil prices have been extremely volatile since oil prices first began to crash in 2015, but most recently the commodity has been rallying. Crude oil touched above $50 last week for the first time in months, however, this rally may be coming to an end and soon.

            On the surface the 17.5% rally in oil since the end of June, coupled with falling U.S stockpiles and renewed output cuts by OPEC countries prove that the supply glut is diminishing and that oil prices could go higher. Unfortunately for OPEC and perhaps fortunately for American drivers, these fundamentals are shaky at best. Crude prices are still down nearly 10% since the start of the year and it appears that several OPEC members, mainly the U.A.E and Iraq have not been complying with the October 2016 agreement between the 10 OPEC countries and Russia to cap production at 1.8 million barrels a day. In fact, preliminary data shows that OPEC oil production rose in July, and that U.S production remains resilient. Information from Baker Hughes shows that the U.S rig count has been generally rising since summer of 2016.

            The fact that U.S production is increasing as OPEC tries to decrease its own production is probably the greatest threat to oil’s recovery. U.S shale drillers have shown that they have been able to weather low oil prices better than most people expected and have been able to remain in business with prices between $40-50 a barrel. With oil prices hovering near $50 it is very possible that U.S producers will ramp up production to take advantage of the momentary higher prices and take market share from OPEC. Therefore, the supply glut will continue no matter what OPEC does, as it cuts production and raises oil prices, U.S producers will increase production and lower them in turn. Fundamentally speaking for oil prices to rise or even stay at $50 a barrel, OPEC needs to show concrete evidence how its output cuts are helping to stop the supply glut, even as America ramps up production.

            Looking at oil’s fundamentals is only one side of trying to figure out where oil prices can possibly go in the future. To get a better understanding of what might happen in the future it is increasingly becoming more important to look at technicals. Technicals have become essential in commodities since algorithms now make most trades and algorithms trade exclusively on technicals. To make a profit in trading oil it is necessary to be able to predict what the algorithms are going to do at any given point.

            Technically speaking oil is has been one of the most volatile investments out this year. In July, the commodity technically went into a bear market after falling 20% since the start of the year. Now oil seems to be making a comeback.

Oil Prices since the beginning of 2016

                         

            However, if you look at the chart above, which shows oil prices since they bottomed out at around $27 in early 2016, you can see that prices have topped out at current levels. There is considerable resistance around $51.50 a barrel, and unless oil breaks through this resistance the only place prices can go is down. The only question that remains is how long prices remain at current levels, it is possible from a technical standpoint, that prices can tread around their current level for at least a few weeks.  

No matter how you look at it though, it looks unlikely that oil prices will go higher, unless big oil producers like OPEC and Russia show a meaningful dent in the supply glut because of their output cuts, it seems likely that oil prices will return to near $40 a barrel within the next few months.

Disclaimer: This material has been written for informational purposes only, it should not be considered as investment advice. Any investment decision should be made after consulting multiple sources and a financial advisor. 

Image Source: https://www.investing.com/commodities/crude-oil