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July 27, 2015, 9:01 a.m. EDT

Which is more likely, $33 or $75 oil?

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By Nigam Arora


Bloomberg

At a time when stocks are hitting highs, oil prices have been cut in half. Relative to past prices, it is tempting to call oil “cheap” and buy it. Indeed, there are many bullish calls by analysts to do just that. I receive a very large number of emails, and investors are showing a high interest in buying oil ETFs here for the long-term. Let us first try to answer a very simple question, “Will oil go to $33 to $75?”

To answer, please take a look at these two charts.

Please click here for an annotated chart of oil price and U. S. shale production .

Please click here for an annotated chart of world liquid fuels production and consumption balance .

Let us examine both the technicals and fundamentals at this time.

Technicals

Based on oil’s current trading pattern, from a medium- to long-term perspective, traditional technical indicators in the categories of momentum, trend, volatility and volume are not only useless, but they are also likely to mislead investors into making wrong decisions.

 

/conga/story/2015/07/trading-strategies.html 350604

There is some merit to looking at Fibonacci extensions. These extensions are shown on the chart. The chart is of NYMEX West Texas Intermediate crude-oil continuous contract. For trading purposes, the symbol is /zigman2/quotes/209726589/delayed CLU25 0.00% .

Fibonacci extensions show downside potential to $33 and upside potential to $75. Interestingly, these levels are also in line with the analysis from the Quantitative Screen of the ZYX Change Method; this screen is based on supply and demand levels. The chart also shows the first resistance and first support levels. The background color of the chart is a composite of some of The Arora Report long-term indicators; green is bullish, red is bearish and blue is neutral. Our long-term models have been bearish on oil for a long time. It also shows trades taken by The Arora Report in oil.

Fundamentals

The oil price chart, on the top left-hand side shows U. S. shale production doubling from two million barrels per day to four million barrels per day. During this period, oil should have fallen, but it stayed rangebound between $90 and $120. The reason was that a vast majority of analysts remained bullish on oil with flawed models, as they were underestimating shale-supply growth and overestimating China demand growth. The chart also shows the point when OPEC decided not to cut the production. The OPEC announcement led to the opening of the flood gates for selling oil, and it had become obvious that analysts were wrong.

The second chart shows the world liquid-fuels production and consumption balance. Supply simply exceeds demand. With one exception, the fundamentals have not changed from what I described in “Nine reasons the price of oil will go lower.” The new development is the nuclear agreement with Iran. In our analysis at The Arora Report, we feel most analysts are likely to be proven wrong in their assessment that it will take Iran a long time to bring oil production to pre-sanctions levels. In our analysis, Iran will reach 3.5 million barrels by mid 2016.

Not investable, but tradable

At this time, oil is simply not investable from the long side. Downward pressure is likely to continue. However, there will be many trading opportunities from both long and short sides. For an example, please see, “What does the chart say about oil?

/zigman2/quotes/209726589/delayed
US : U.S.: Nymex
$ 46.19
0.00 0.00%
Volume: 0.00
Jan. 19, 2021 5:07p
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