The shift in oil prices is a common topic on the top of many people’s minds. Oil prices have a large effect on the U.S. economy through both consumers and corporations. Oil prices could hurt the pocketbook of the consumer, while also increasing costs for producers.
One of the enduring situations has been the spread in oil prices between U.S. West Texas Intermediate (WTI) crude and Brent oil, which is the international market. We have consistently seen this difference average approximately $20.00 per barrel, as much of America’s crude is landlocked and unable to be transported to refineries (no new capacity has been built in decades) that can convert the product to gasoline.
With the introduction of shale technology, there is now becoming a real possibility that a glut of oil will flood the market, driving WTI oil prices down. The net result is that gasoline prices will still remain high, as there are limits to transportation and refining capabilities in America.
Another situation is the recent meeting of the Organization of the Petroleum Exporting Countries (OPEC), at which there has been a disagreement between Saudi Arabia, the largest producer of oil, and Iraq, which is now the second-largest producer.
Because of the weak global economy, many are expecting OPEC to reduce production. However, neither Iraq nor Saudi Arabia is willing to reduce production if oversupply becomes an issue. Combining stubborn resistance to reduce supplies by OPEC members, with a massive increase in domestic production in America, oil prices could continue to decline.
The tone of the debate is best evidenced by recent comments from Iraq’s OPEC governor, Falah Alamri, who said, “Iraq will never cut its production. Some who increased their production in the last two years, they should do so.” (Source: “OPEC Keeps Production Ceiling, Extends Chief’s Term,” The Wall Street Journal, December 12, 2012.)
Chart courtesy of www.StockCharts.com
Clearly, oil prices on a technical analysis basis look weak. With hostile comments about refusing any reduction in supply, we should see a continued drop in oil prices. Of course, this depends on geopolitical risks in 2013 that hinge on Israel. While technical analysis currently shows that oil prices are most likely headed below $80.00, an election in Israel next year could change this outlook.
If Israel attacks Iran, then the technical analysis picture would certainly change. At that point, the downward sloping resistance levels will most likely be broken, and oil prices will be sent higher. However, without an outright attack, fundamental and technical analysis points to lower oil prices in the future.