How High Will Oil Prices Go?
- I do hate making predictions
- Uh oh, technical analysis
- My prediction (both cowardly and gutsy versions)
I’ve said it before, but it bears repeating: I don’t like making serious predictions about commodity prices. It’s generally a losing proposition, so understand that I’m writing today’s article to provide in-print edification of my views.
I’m going to give a specific number in a minute, but the general diagnosis for oil fits into my overarching thesis: nearly all commodities will scream ever-higher in price as world governments treat their currencies like a red-headed rented step-child.
To arrive at my hasty oil-price prediction, I’m going to use a well-worn technical pattern extrapolation known as a contracting triangle.
Forgive my artwork, (I never was a color between the lines kind of guy) but take a look at the chart below to see what I’m working with:
You’ll see the contracting triangle (in red) pinching the price of oil into a smaller and smaller ascending pattern two years out.
You’ll also see the gray line I’ve drawn in to indicate where prices could be if the current pattern continues.
This pattern, so far, has been in play for two years, since oil prices bottomed in early 2009. That was after the huge run-up in mid to late 2008 that saw West Texas crude breach $147 a barrel.
Technical patterns are not written in stone – any day now this pattern could break to the up or downside, and then we’d be looking at a different extrapolation.
Generally, patterns will end well before their most obvious conclusion. In this case, I don’t expect oil prices to funnel into the triangle point at the $120 level in January of 2013. That would be highly unlikely. What’s more likely is that the price of oil will at some point break above or below the two lines of the triangle.
Once that happens, all bets are off. Oil could head back to $35 a barrel (unlikely), or they’ll skyrocket back towards old highs of $147 (more likely).
Now, I should tell you that I’m not much of a believer or follower of technical analysis. But in many cases – including this one – technical analysis can put a specific framework for price prediction on a market phenomenon that we can verify elsewhere.
For instance, this specific phenomenon of higher prices met by ever smaller dips in price makes sense in terms of the world market for oil and how oil interplays with capital markets.
As oil prices move higher and higher, consumers will continue to find ways to reduce consumption – which will account for frequent dips.
But what accounts for the resumption of the upward slope?
That would be a constricted supply (aka peak oil production) coupled with demand growth in the developing world.
We can expect the West to continue to reduce usage, improve efficiency and find substitutes for oil at regular pain points along the price continuum.
I’ve re-posted the above chart with labels that better describe the phenomena:
So my cowardly, no-hype prediction for the price of oil is for prices to stay above $100 a barrel for the next two years, but stay below $120 a barrel.
But you didn’t open this email to get my cowardly prediction.
My gutsy prediction is for oil to break out of the current pattern in the next year, and then challenge old highs of $147 sometime in the next 18 months.
In any event, I’d be shocked to see oil prices dip under $80 anytime over the next few years.
Good investing,
Kevin McElroy
Editor
Resource Prospector
