Where next for the Oil Price?

Where is the oil price going? The Saudi game of flooding the market with cheap oil to try and put the US shale industry out of action hasn’t yielded any real scalps yet which suggests that we probably have a long way to go in this global tussle. Add to that the almost certain to strengthen USD as rate rises appear next year at the latest and there really is almost no argument to support oil switching back into a proper up-trend any time soon.

The true question to be asking is just how low the price will go.

It’s important to forget all the ‘Peak Oil’ arguments that dominate any bull market as we all know there is more than enough oil for multiple decades and we also know that the global economy can absorb very high prices anyway. We also have to accept that it requires OPEC price floors to push prices above $50 and for rampant speculation to drive it to $100+.

Arguably, even at $40, oil is over priced, in supply and demand terms. The market can produce all we need from sub $15 wells and indeed, most of us can easily remember oil at that level in the last 20 years or so. And it wasn’t long ago that it was $9. Interestingly, gold was somewhere around $230 around that time. Another grotesquely over priced commodity also clearly re-basing to a fairer, non speculative price.

How low will oil go? I’ve no idea to be honest but there is almost nothing to stop it going below $30. When the trend does finally turn, however, it will present a tremendous buying opportunity to steadily scale in over time, build a position, locking in profit points and run the up-trend. If the Saudi’s achieve their goal of crippling the non-OPEC future supply and thus regain control of the market again then they will rapidly implement a high floor so as to reap the huge rewards of their game. But that time could yet be a long way off. We need to see capitulation, the shutting down of projects and the collapse and clear out of the weakly funded operators.

Tim Morris of CFDs.com