Which Way Are Oil Prices Headed?
The Dynamic Wealth Report
December 1, 2008
Ignore OPEC... Oil Production Doesn't Matter
Just two weeks ago I wrote about falling oil prices.
Gas prices had crashed below the $2 mark. Oil was trading below $50 a barrel for the
first time in months. The inflation threat which built all summer long
has disappeared. Now the big concern is deflation and the global
economic slowdown.
Believe it or not, the global economy is going to impact oil prices more
than anything else.
Oil producing nations and OPEC are concerned oil prices are too low.
They’re trying to artificially prop up prices by cutting supply. It
doesn’t matter how they play with supply. The economic slowdown is
stifling demand.
Long term, oil prices are heading higher.
But for now, they’re going to trend lower… much lower.
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OPEC had a big meeting in Cairo this weekend. It was an unofficial
event. Yet many traders assumed they’d announce another cut in
production. That’s why oil traded up from $49 to just over $55 last
week.
There wasn’t a production cut, but tension is apparently forming in the
cartel.
The Saudi Oil Minister noted it was “too early” to make another output
cut. Remember it was only a few weeks ago, in late October, when output
was cut by 1.5 million barrels a day.
But the Iranian Oil Minister had a different take. He announced on state
TV OPEC would look to cut production in December by 1 to 1.5 million
barrels a day. He wanted to "restore oil prices to $90 per barrel."
Oil prices traded lower on the news… significantly lower. Cuts in oil
production won’t matter for some time.
Why the disconnect?
It’s the economy. Economic news from the EuroZone, Great Britain,
and China is depressing. According to China Daily News the Purchasing
Managers' Index (PMI) for China's manufacturing sector dropped 5.8
percentage points during the month.
It’s the lowest the Index has ever been since China's National Bureau of
Statistics started tracking it in 2005.
What’s it mean? It means China’s economy is slowing. That means
production is falling, growth is falling, economic demand is wavering. One of the fastest growing consumers of oil is now facing a slow down…
and that means oil consumption is slowing as well.
Clearly a global fall in demand is driving prices lower… with falling
demand OPECs production cuts will do little to stem the fall of oil.
Now before we throw OPEC entirely under the bus, let’s look at the US.
According to World Oil’s November journal September oil production here
in the US was down as well. Total production fell 17%, partially because
of hurricanes, but also because of falling demand.
So, let’s look at the entire picture. Global economies are slowing, even
China. OPEC’s cutting production and probably will again. And, to top it
off, US production is falling as well. Yet, oil prices are still
falling.
All of this tells me oil’s heading lower short-term. I think oil will fall as low
as $40 or maybe even $30 a barrel before rebounding. If you want to
profit from this fall, look at some of the ETF’s tracking the price of
oil. UltraShort Oil & Gas ProShares (DUG) is a perfect way to profit.
• Mortgage Finance (UP 31%)
Believe it or not, the mortgage finance industry is up 31% in the last
month. The move higher is being lead by Fannie Mae (FNM) and
Freddie Mac
(FRE). If you ask me this is a “dead cat bounce”, not an actual recovery
in the industry.
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