Predicting markets is never easy, especially in the commodity space. With oil prices being very erratic, this causes analysts a lot of headaches. Predicting markets when it comes to oil prices is even more challenging, as there are many issues when it comes to the supply situation. One should take a step back from the day-to-day volatility when predicting markets. Many have made the case that oil prices are doomed, as peak oil has occurred. “Peak oil” is a term to denote the maximum amount of oil that can be produced. The total supply left in reserves is now on the decline.
The argument for limiting many items has been around for hundreds of years. You’ll always hear about people predicting markets by calling for a limit to items such as oil, food and other natural resources. While there are limits naturally in the world, there is no way anyone can properly make an educated estimate on what this is. We have consistently heard about the limits of growing food and yet records continue to drop over the last 100 years, even though the land used has not increased. Peak oil in theory makes sense, but the truth is that technological innovations will continue to expand the limits of what’s attainable.
A new study by Harvard Kennedy School’s Belfer Center for Science and International Affairs showed that within eight years, the world will be able to produce over 110 million barrels of oil per day. Currently the world is producing 93 million barrels a day. This represents an 18% increase the amount of oil produced on a daily basis. Where will oil prices be at that point? The truth is that nobody really knows.
Anyone who calls for limits assumes that there will be no technological advances. I’d rather look at the human race since the beginning of time and note that we are capable of immense technological innovations. For those people who say there will be an end to a certain commodity, they are essentially betting against human nature. After all, we used to live in caves and now we live in skyscrapers. That’s not to say we should use up all of our resources as quickly as possible. There are certainly going to be increased costs in obtaining the hard-to-get resources. But there are also significant technological innovations that will help us save energy. Predicting markets in such a changing and dynamic landscape is not easy, hence the volatile moves in oil prices.
Chart courtesy of www.StockCharts.com
Oil prices have continued to sell off this year for two major reasons. The first is the slowing global world economy. Less economic growth means less demand. The second is that Saudi Arabia has consistently introduced a high level of supply into the market, depressing oil prices. The geopolitical relationships involved should be incorporated when predicting markets. Saudi Arabia is trying to cripple the reigning Iranian government through financial means, meaning lower oil prices.
With the recent selloff in oil prices, the market has become extremely oversold. This can be seen where oil prices have hit the lows from last year as well as in the oversold Relative Strength Index (RSI). Predicting markets cannot be done through one input, but rather a collaboration of several pieces of data. One thing to note is the downward sloping resistance line. Oil prices would need to break above this level before I would even think of trying to catch a move back up. Short-term supply and demand situations will drive volatility and oil prices. You must be quick and adept at maneuvering your trading positions. Watch for the break above the trendline, otherwise oil prices will remain depressed.