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Oil Outlook

The bad news for oil keeps piling on.  Oil has fallen for three out of the last four weeks and the number of oil rigs in the US according to Baker Hughes keep falling – 10th straight week.

Is there no end in sight?

The futures market for oil is telling suppliers to store it.  In short, the bet is for prices to hopefully increase in the future.

In short, investment in the sector falsely assumed that the Chinese economy would grow at over 10% consistently in the future.  So much for forecasts.  This was never going to be the case.  Also, forecasts of oil going over $200 a barrel were equally wrong.

The Saudis keep pumping out oil and show no sign of reversing course.  Part of the reason is that the Saudis need the extra revenue but the real reason is competitive.  They want to snuff out high-cost production alternatives like deep offshore oil and shale.  The Saudis see a recovery in about a year or two when demand picks up.  Prices should be around $70 to $80 dollars a barrel.

This is probably not that far off the mark.  If central banks are priming for interest rate rises, that means the business cycle is turning up.  Oil does very well at the top of the business cycle.  Of course, we are a long way from that.  But it means that as investors and traders, we should keep a close eye on the oil market.

Already some of the oil companies have rebounded off their lows. There is probably a lot more room for price appreciation in the future once physical oil takes off.

Supply will one day not suffice.  Even the Persian Gulf countries have shelved numerous projects.  My guess is that both the private oil companies and the state owned oil firms will overreact and go overboard in stopping projects.  This will over time set in motion conditions where a demand shock will result in a spike in oil prices.  We are not there yet, but again something to keep an eye on.

Forecast

I expect prices to rise over the medium to long-term.  Investors and traders should take positions within the next 6 months to 1 year for this eventuality.  Short-term trading is always possible due to the volatility of oil prices which can spike up due to geo-political events.