Crude Oil Prices Could Fall to $80/Barrel?

By: InvestmentContrarian

George Leong writes: Oil prices are heading higher on the chart with the cash West Texas Intermediate (WTI) crude rallying back toward the $100.00 level after threatening to test $90.00.

Steady economic signs in the United States, China, and Japan—the three largest economies in the world—along with some muted growth in the eurozone and Europe are adding some spark to the oil futures… But hold on; doesn’t the buying seem somewhat premature?

I’d say so, as I believe oil prices may have limited upside unless something dramatic surfaces in the Middle East that impacts OPEC oil.

The Organization of the Petroleum Exporting Countries (OPEC) has also come out and said it would maintain its current daily production quota and not cut supply in order to add support to oil prices.

I doubt we will see $130.00-per-barrel oil prices anytime soon—unless, of course, tensions escalate in the Middle East and a war breaks out across a wider region that would impact the flow of OPEC oil. The current nuclear agreement in Iran has also added some stability to the region.

And the futures market for oil supports my view, too. A look at the oil futures actually shows expectations for oil prices should decline back towards $92.00 by the end of 2014, drop below $90.00 in 2015, and continue downward to $80.00 by 2018. The December 2022 futures contract points to $78.00-per-barrel oil.

The chart of WTI oil below shows the downward channel and recent breakout, which I doubt will have much holding power as it nears the $100.00 level.

Chart courtesy of www.StockCharts.com

Now while the prospects over the next eight years don’t look great, the actual movement of oil prices will obviously be dependent on other variables that will come into play, such as demand, industrial growth, geopolitical tensions, and the production of domestic oil via fracking.

It’s the rising production of domestic oil through fracking that could inevitably drive a downward push in oil prices of both WTI and Brent crude.

I believe that there’s a real possibility America could cut its buying of OPEC oil in the future as fracking oil production rises. Of course, the country could also supplement OPEC oil with extra oil from the Alberta tar sands, which continues to be a major issue in the country.

If this scenario plays out, we could cut the volatility of oil prices that has played a big role in the past but has now lessened with the reduced buying of OPEC oil.

Oil and gas magnate T. Boone Pickens is surely enjoying what he is seeing, as he has always been extremely vocal about cutting the country’s dependence on OPEC oil.

For the consumer, this may mean lower gasoline prices, and for businesses, it may mean lower energy prices.

The big winners will likely continue to be the oil companies that are undertaking fracking, such as Continental Resources, Inc. (NYSE/CLR) and Whiting Petroleum Corporation (NYSE/WLL). I also like Schlumberger Limited (NYSE/SLB) and Halliburton Company (NYSE/HAL).

By George Leong, BA, B. Comm.
www.investmentcontrarians.com

Investment Contrarians is our daily financial e-letter dedicated to helping investors make money by going against the “herd mentality.”

George Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. See George Leong Article Archives

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