Oil Prices

Everyone is calling for lower oil prices and with the level on oil inventory along with 'don't stop the pump' from Saudi Arabia, it is logical to expect lower prices. After all, it is the first law of economics; supply and demand! But as most things in life, it is not so black and white. There are always external factors that make everything ideal to be more reality, some people call them second order effects and I call them unintentional consequences. Whatever one might call these external effects, they do alter the pricing equation based on supply and demand. For oil, it is what one might call "Geopolitical effects."

There is a cost associated with every barrel of oil that is being pumped. When the price falls near or below this producer's price, eventually the producer will stop pumping to avoid losing money. Otherwise, it will be insane to continue to pump and giving money away for each barrel it sells. After all, the primary purpose of any business is to make money, not to give away money (even a non-profit business can't sustain for long by giving money away, unless you are the government.)

In addition, there are countries relying on the revenues generated by oil to fuel their economy. When oil becomes unprofitable for these countries to produce and unable to generate the needed revenues to sustain their economy, then social arrest within these countries could start to emerge. Therefore, it is the self-interest (or self-survival) for the leaders of these oil producing countries to avoid having the price of oil fall below and stay below this level for too long, or risk the possibility of being throw out of power.

Here are the charts for the crude oil. As one can see, it is approaching the critical $35 level as this price level has been speculated to be the price many oil producing countries are using as a benchmark for their budget planning. The last time oil has fall below $35 was in the beginning of 2009 where it fell to $33.20 a barrel. And it was at a low of $10.65 back in 1999.


Monthly Crude Oil Futures:

(click on the chart to enlarge)



Weekly Crude Oil Futures:




Here is the daily price chart for the crude oil futures. There appears to be a head & shoulder pattern with a measured move at 18.22 and 13.98 for 80% and 100% respectively. Also, there is an 'H' breakdown with a measured move at 31 and 27.47, the 127% & 141% Fibonacci extension respectively.


Daily Crude Oil Futures:



I do not believe the head & shoulder pattern will play out as I do not believe the leaders of those major oil producing countries will let the price of crude to fall below $30 a barrel and stay there for too long. They know their position of power could be in jeopardy if the price falls below $30.

One final note, other than watching the geopolitical picture, keep your eyes on the US dollar. Lower dollar leads to higher commodities prices. The US dollar is one of the main vehicle for moving the crude prices other than the fundamental of supply and demand (one way someone or some institutions can fuel inflation! hint hint low interest rate!)