Wednesday, February 04, 2009
As Recession Worsen, Oil Prices Can Go Lower
Wednesday, 04 February 2009
Oil prices are trading now below $40 per barrel. But the question is has the price of oil bottomed? The oil markets’ answer is clear and it is negative. Oil prices can go lower as recessions shows its teeth with multinational companies announcing massive layoffs every day, the U.S. housing market posting a $3.3 trillion loss in value last year, while almost one in six owners with mortgages owing more than their homes are worth and banks collapsing collapsing like castle in the sand under the weight of toxic debts. Markets are waiting for the results of the new stimulus package of U.S. president Barak Obama, but its results will not be seen soon. This situation makes the oil market very nervous and very volatile. It is characteristic that last week oil prices rallied more than 40% -- it traded at around $45 last Tuesday after touching $32.40 per barrel about a month ago -- but investors may want to hold off buying oil futures contracts or venture forth with oil-related stock plays. And the reasons are both technical and fundamental. At the same time technical analysts almost universally agree that 'a bottom' is a process, not an event. In other words, don't expect it to happen in a day, or a week; typically, a bottom can take weeks -- and sometimes even months -- to form. Oil has two price hurdles up ahead: the 50-day moving average at $46.27, and the psychologically-important $50 level. If oil can clear and close above each level for three consecutive days, that would be bullish, but we're not there yet. And until it does, the oil bears will have much technical evidence to argue that oil's current rally is largely a short-covering rally.
From a fundamental standpoint, the oil bears remain in charge: inventories continue to build at key U.S. storage area, such as the NYMEX contract storage facilities at Cushing, Oklahoma, and in supertankers at sea. Further, it is by no means certain among traders that OPEC's oil supply cuts will be enough to offset stagnant global demand and year-over-year oil consumption declines in the United States. If those U.S. consumption declines continue, oil's downward path will continue.
Finally, don't succumb to superficial claims. Currently, some are arguing that 'oil can't possibly drop below $30 per barrel,' particularly if the U.S. fiscal stimulus package increases GDP growth above where it would be without the stimulus. True, the fiscal stimulus will help, but the oil equation is tied more to oil demand than GDP growth. In other words, economic conditions could improve, but large oil consumption growth may not return, due to changed consumer patterns.
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