Here’s Why Oil Prices Could Tumble
This is a message for all those who are bullish on oil prices: be very careful. We could be headed for oil prices of $16.00 per barrel.
Before going into any details, I want to make one thing very clear: I am not an expert in oil prices. My focus is on stocks and precious metals. There are too many factors involved when it comes to the oil market—demand, supply, politics, cartels, trade, wars, and peace. But I do pay attention to the chart. I believe prices can tell much more.
As it stands, oil charts suggest we could see a bearish move ahead, and it will be an ugly one. Please look at the chart of oil prices below. Pay close attention to the blue lines and the yellow circled areas.
The blue lines represent the Fibonacci retracement. Technical analysts use this indicator to find possible support and resistance levels. They look at retracement levels of 38%, 50%, and 62% as key levels. The yellow circles on the chart above are the 50% retracement levels.
With this said, noticed something interesting?
You see, over the last year, oil prices have acted in a chaotic but predictable way. Consider the decline in oil prices between late June and late August. Oil collapsed from around $62.00 to $40.00. Then, it retraced back a bit—to the Fibonacci retracement level of 50%.
Chart courtesy of www.StockCharts.com
As soon as that level was reached, we saw another move to the down side and oil prices settled around $27.50 per barrel.
Since then, they have been on an upside move. Currently, oil prices stand at the 50% retracement level.
Looking at this, I ask one question: could oil prices repeat what they did before? It’s very possible. Mind you, if this happens, things could get really ugly.
Consider this: during the first decline (the one between June and August) oil prices declined roughly $22.00. After the retracement, they declined again by roughly $22.00, from $50.00 to $27.50.
If we assume a similar decline will occur again, with oil prices currently trading around $38.00, we could see $16.00-per-barrel oil—its lowest level since 1999.
What Does $16.00 Oil Mean?
For starters, oil prices at $16.00 will mean more volatility on the stock market. Over the past few months, we have noticed that oil prices and key stock indices like the S&P 500 have been highly correlated. More of the same could follow—oil drops, the S&P 500 follows.
You also need to be careful about resource-based currencies like the Canadian dollar, which moves in line with oil. As oil prices have rallied since mid-February, the Canadian dollar has rallied as well. If oil prices tumble again, the Canadian dollar will also take a hit.
Get ready for interventions from governments and central banks as well. Yes, I know it sounds alarmist, but know that $16.00 could be troublesome for many small- and medium-sized oil producers. I question if there will be some sort of bailout process for them. Certainly, time will tell more.
Last but not the least, $16.00 oil would mean a severe global recession. Why? If oil prices drop that low, it will mean demand is extremely low, suggesting manufacturing and overall spending has declined. That’s not a good sign for the global economy.