How High Could Crude Oil Go? Look at 2011
With OPEC and Russia mulling further production cuts, crude oil is on its longest and biggest rally of the year. Add the US missile strike on Syria, geopolitical tension, and upcoming elections in Europe, and it's easy to see why. To see how high it could go, let's look at the historical charts.
By Vikram Rangala
Monday, April 10, 2017 - 00:00
The S&P 500 (Nadex US 500) rose Monday morning with energy shares leading the way. It was a fifth consecutive up day after last week's 3.2 percent gain. The obvious catalyst was the US missile strike on Syria. The US launched 59 Tomahawk cruise missiles in retaliation for Syrian President Bashar al-Assad's use of sarin gas on civilians. The US action drew praise from many, but also concern about what the long-term plan and repercussions might be.
Threats to stability in the Middle East generally cause spikes in oil prices, but in fact, Syria itself is not a major oil producer. It ranks a little below Cuba and Poland at #64. Its main importance to oil traders is as a neighbor to Iraq (#4), a haven for ISIS, and site of what may already be a proxy war between Russia and Iran on one side and the US on the other—three of the top 6 producers. When a massive humanitarian crisis meets a crisis among leading producers of the world's major energy source, it's hard to dismiss the potential severity. Add another factor: that one of those countries, Russia, recently worked to destabilize the democratic process in another, the US, and Syria starts to look like a perfect storm brewing.
None of that means, however, that oil prices will shoot up past $60 a barrel again. In simple supply and demand terms, the world is still in a relative glut. With crude oil, however, the price is determined by more than simple supply and demand. Even if Russia does follow through on its possible extension of the production cuts it agreed to with OPEC, and even if OPEC joins in, North American shale is ready and willing to fill the gap, especially if prices keep moving higher. On the other side of the argument, the dollar remains strong and alternative fuels are gaining market share. So could this week-long spike turn into a longer-term rally?
With so many variables and more being added, seemingly, every other day, it's not an easy question to answer. Pres. Trump concluded a meeting with Chinese Premier Xi Jinping tweeting that they had created "tremendous goodwill and friendship," then a day later sent a carrier group towards China's ally, North Korea. After a campaign in which he portrayed China as a threat to US trade and jobs and even as the source of the "hoax" of climate change, the president faces a tough balancing act between international and domestic concerns. A trade war with China would further affect oil prices, especially since China has backed Assad in the UN.
With so many unknowns, it can help to look at what we do know: a historical price chart. Here are oil prices over the last 10 years.
If you look at the period from the drop in 2014 from the $100 level to less than $50, which is where we've been for most of the last two years, you see that the market is now approaching the 38.2% Fibonacci retracement level. Why is that number significant to anyone other than Fibonacci-lovers? That's right around the highs of Spring 2015. The oil market has been in an uptrend since the start of 2016 and that level is a likely goal.
The question after that is, could it go higher than the 38.2% level? Could oil once again top $60 a barrel? $75? Could it even retest $100? With power plants switching to natural gas, a rapid growth in solar power, and all those new Tesla Model 3s and Chevy Bolts about to hit the roads, could we ever see $100 a barrel again?
Instead of that arbitrary round number, let's stick with the Fibonacci and compare the 2014 drop to the previous comparable (and bigger) drop of 2008. After oil (along with other markets) bottomed in early 2009, it began a steady climb up through the Fibonacci levels, pausing for over 10 months in a range around the 38.2% level near $80, before completing and exceeding a 61.8% retracement. Then as now, we had a new president, tension in the Middle East, and plenty of economic uncertainty.
All of which is to say, keep an eye on the big picture even when you're trading short-term. It makes sense not to expect a six-day rally in crude oil to just keep on going without pullbacks. But it also makes sense not to rule out a return to $60 or $40 (or both) in the coming months. It's true of the markets as it is of geopolitics: expect the unexpected.
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