This past Thanksgiving, the Saudi’s announced that they would not support higher
oil prices by cutting OPEC production. The bottom fell out of the market the next
day. They announced this action on the Thursday of Thanksgiving – when
the US markets would be closed. Wow….quite the coincidence. I think not.
With a 900B sovereign wealth fund, they shorted oil in the futures and options markets
and in essence, purchased a floor for their production for a period of time. And, drove
the price further down with their huge shorting action.
Ok, so the bottom fell out of the price of oil after the Saudi announcement in November.
But, the dollar was rising anyway, so any additional influence on the price of oil would have
a double effect on the price drop. That’s what happened – oil went into a “parabolic”
drop with the Saudi announcement at a time when the dollar was already in a steep rise.
There is usually only one end to parabolic rises or drops – a correction to the mean. We
maintain that a parabolic drop is better in the long run than a slow bleed down in prices.
Prices usually rebound from the parabolic drop and stabilize along longer term trend lines.
So, what does this mean for the price of oil? When can we expect a bottom?
The dollar has just gone through a possible “blow off top” from 90 to 92. The dollar
is taking a short breather right now and may consolidate here for a while.
The dollar will take another leap after this consolidation – the direction of that leap
will tell us where oil is headed.
Oh, and Happy New Year to all the American Oilmen out there!