I warned you quite some time ago that the price of crude oil would fall substantially, to below $70 a barrel and quite possibly lower, before it bottoms.
Since Oct. 16, oil has plunged from $102.49 a barrel to $94.11, an 8.2 percent hit.
More losses are coming for oil. This monthly chart confirms it.
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As you can clearly see, oil’s rally since its 2009 crash-era low has been choppy, with overlapping waves. This is not the kind of action that is conducive to a bottom.
Instead, it’s typical of a bear market that has not ended, and that has another leg to the downside coming.
That leg down is beginning now. Major technical support lies at $60-$62, and should that give way, oil will not bottom until it falls to as low as $40.
Hard to believe, when there are so many die-hard oil bulls out there? When there are so many political hotspots around the world that could cause oil to rally?
Well, that’s what they said about gold back in September 2011 when the Fed announced QEIII. No way, they said, could gold go down. But it did, and it fell hard.
From a fundamental point of view, oil is not bullish. Oil inventories have been rising for seven straight weeks. Last week, they rose 5.2 million barrels. Over the past four weeks, inventories have risen by 22 million barrels, the second largest increase since February 2009.
|Oil inventories have recently seen the second largest rise since February 2009.|
What’s especially difficult for oil right now is Europe. The euro region is in a freefall. Almost every country in Europe is contracting, severely. Unemployment continues to soar. Disinflation has tightened its grip, with the latest inflation data so bad — at 0.7 percent year-over-year, that the European Central Bank cut rates to 0.25 percent, a record low.
In addition, the U.S. is well on its way to 100 percent energy independence. OPEC is losing control over the energy markets, and right now, that’s hugely bearish for crude oil.
But mark my words, once oil bottoms, a new bull market will be hatched.
How so, when there are do many dynamic changes occurring in the oil market, with the U.S. set to become energy independent?
There are three reasons oil will soar again, after it bottoms.
First, there’s China. While China is home to oodles of natural gas, its economy is still oil thirsty and will be for a very long time.
In September, China surpassed the U.S. as the largest buyer of oil in international markets. China’s net oil imports reached 6.3 million barrels a day, passing the U.S. at 6.2 million barrels per day, according to U.S. government reports.
Total Chinese demand for oil could reach about 10 million barrels per day and rise to a staggering 18 million barrels per day by 2035, according to data compiled by the World Bank.
In terms of dependence on oil, the U.S. and China are moving in opposite directions. While the U.S. will soon be energy independent, China will soon be the No. 1 consumer of oil and almost entirely dependent upon foreign supplies.
Second, there’s incipient global inflation and a coming end to the dollar reserve system. Europe won’t be stuck in disinflation for long. Nor will anyone else. At some point in the not-too-distant future, central bank money printing will result in much higher inflation and that will be bullish for oil prices.
In addition, the U.S. dollar will eventually lose its reserve currency role, and be supplanted by a new global reserve currency, in electronic form. The dollar’s diminished role and the uncertainty of a new monetary system and reserve currency is bound to be very bullish for oil prices.
Third, there’s the war cycles. As I’ve discussed and showed you before, the cycles of war point consistently higher into the year 2020. Rising geo-political tension around the globe is going to accelerate in the months and years ahead, putting a firm bid under oil prices.
How can you play the downside in oil over the next few months, as oil heads toward a major bottom?
Simple. Consider buying shares in an inverse ETF. My favorite oil ETF is the ProShares UltraShort DJ-UBS Crude Oil (NYSEARCA:SCO).
What about energy shares? With very few exceptions, most should trade lower along with oil over the next few months. Then, energy shares will become a fantastic buy.
Lastly, as noted in my previous columns, keep a close eye on gold right now. The action in the yellow metal is critical; it’s in the middle of a timeframe for a major low. And while new lows in gold are still possible, gold is inching its way closer to that point in time where it blasts off again.
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