Analysts love to predict movement in crude and whats worse everyone wants to apply a different theory, each coming up with their own results.
The most confounding of them all is technical analysis based on historical price movements and volume fluctuations. They're supposed to factor in unexpected risks arising in the future but the question is to what extent?
Yesterday there was a prediction by Robert Prechter, who shot to fame after predicting the 1987 stock market crash. According to him Crude will fall to a range bound level of USD 4-10. Any sane person who has followed crude or the big Oils would laugh hysterically till his/her lungs can support no more, I know I did. His prediction was based on 'Elliot Wave Principle' which some analysts term as pseudoscientific and follows the crowd psychology, it says "all investors turn pessimistic after showing a bout of optimism."
Crude can't by any means go back to $10. I am an ardent believer in supply side economics when it comes to crude pricing and it makes perfect sense for a wasting asset which needs substantial capital investment to keep cost of production down.
Due to extreme cost cutting measures adopted by the Big Oils they have managed to post returns past expectations but the substantial cuts in capex are an area of concern. The average crude extraction price has been consistently rising as new areas are being explored. The old warhorses like Thunder Horse and Atlantis are no longer pumping oil as they used to half a decade back. The new focus areas are frigid Russian wells, Brazilian pre-salt and Canadian oil sands. Russia and Canada will require huge capex for achieving subsistence levels, as of now in comparison to the prevailing crude price, these fields are prohibitive.
Then there're also cases like Venezuela where the govt. is hell bent on nationalizing all natural assets, with such cases happening at regular intervals (Russia and possibly Brazil in the near future) oil companies have to tread with care.
If you ask me crude will hover within $70-$80 as in this range even the costliest oil wells are profitable, and profit is what these companies need if they want to secure a future for themselves.
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6 comments:
interesting....keep em coming!!!
shobhan, I don't completely agree that robert prechter's analysis is totally baseless, let alone laughable!!
EWI is purely technical analysis, based on price and volume and trends. The concept that price moves in trends and history repeats is not completely alien.. and probably more successful in prediction than random walks so oil going back to $10 level might be a reality sometime in the next 10 years
--Raveendra
They say Mr Prechter tries to capture the essence of human behaviour through the EWP but you can't just apply it to any sector and get away with it. The theory may not be laughable but the prediction he gave about crude is nothing short of it. Anyone tracking crude and the companies involved would wholeheartedly vouch for it. I have already given reasons why, they're not just an opinion, they're based on hard facts.
http://tonto.eia.doe.gov/dnav/pet/hist/rwtcM.htm
Dec 2008 oil was at $30
Yes oil production prices are rising, profit margins declining, no new refineries..
but who is factoring in alternative sources(of energy) yet?? not in the short term but in 10 years time that is a likelihood and that's why a $10 price tag on oil doesn't seem implausible.
Even I hope we get some renewable alternative sources of energy real soon but as of now they're just assumptions. We recently saw a major financial catastrophe due to false assumptions, I hope we don't get trapped in another bubble fuelled by speculation in commodities this time. Thats why there's no point using such theories and making nostradamus type predictions.
Still, I think totally discounting technical analysis (especially cited useful for currencies and commodities)leaves you with absolutely no basis of sound prediction. fundamental analysis hardly helps with that.
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