Oil at Manageable Levels, but Risk Remains


oil pricesOil prices are in a bear market, with the July West Texas Intermediate (WTI) futures contract down 25% from its 52-week high reached on March 1, 2012, looking for support at the $80.00 level. The downward slide to below the 50-day and 200-day moving averages is bearish, driven by renewed nervousness towards the condition of major economies in the eurozone, the U.S., and China. The decline in oil prices foreshadows potential growth issues down the road. The uneasiness of the global economies will be a factor, as I discussed in Global Economies Backtracking.

Take a look at the WTI futures contracts. Extending the contract to 2020, prices are currently trading in the mid-$80.00 range. This price is also supported by the oil cartel, the Organization of Petroleum Exporting Countries (OPEC). According to its internally produced World Oil Outlook (WOO), oil prices, in nominal terms, could hold in a range of $85.00 to $95.00 a barrel for the rest of this decade. The report blames the spikes in oil prices on speculators, which I fully agree with, but it’s part of the business. An interesting note in the WOO report is the assumption that oil will reach $133.00 per barrel by 2035.

It’s interesting to try to understand how the oil cartel thinks. The report says the current weakness in oil prices is due to the state of the global economy that “will be marked by below average trend growth, in combination with high unemployment in developed economies and continuing global growth imbalances.”

And, while oil prices are estimated to trade below $100.00 a barrel for the next eight years, you know that there will be volatility that could drive prices to well above $100.00. Factors include speculation and troubles in the oil-producing regions in the Middle East.

Hostilities in the oil-producing regions could easily trigger a spike in oil and gasoline prices. Recall what happened in Libya, as the country was vulnerable to civil war prior to the killing of Colonel Gaddafi. With the country having the 12th largest oil reserve in the world, any major disruption to the oil flow from Libya could have sent world oil prices surging.

The ability of OPEC oil prices to impact our thirst for oil continues to be an issue that needs to be resolve whether it’s via alternative energies or other sources of oil.

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Energy mogul T. Boone Pickens has pushed the use of natural gas energy; thereby cutting the country’s dependence on foreign oil from OPEC.

Of course, a good option that may help to solve some of the impact from OPEC oil is the upcoming building of a pipeline that will bring oil from the massive Canadian tar sands to Texas. This is a viable option, but there is some resistance due to concerns regarding the environmental impact relating to the process of deriving oil from the tar sands.

Now only if the decline in oil can translate into much lower gasoline prices at the pumps!

About the Author, Browse George Leong's Articles

George Leong is a senior editor at Lombardi Financial. He has been involved in analyzing the stock markets for two decades, employing both fundamental and technical analysis. His overall market timing and trading knowledge are extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi Financial’s popular financial newsletters, including Red-Hot Small-Caps, Lombardi’s Special Situations, Judgment Day Profit Letter, Pennies to Millions, and 100% Letter. He is also the editor-in-chief of a... Read Full Bio »