Monday, oil dropped 5% after Goldman Sachs cut its short-term price forecast to $42 a barrel for Brent, all the way from $80. Considering within the last year, Brent Crude has been as high as $111.38 and is now down to $45 which goes all the way below 2009 lows.
And the Decapitation Strike Continues…
In most bull markets, there are times where we see downward corrections with prices continuing to snapback higher over time. There are those less frequent times however, when prices get slashed, and then they get slashed again and again which kills forward momentum in any immediate bull market moves.
U.S. stocks are not in this sort of environment at the moment. Everything seems somewhat normal and even when prices fall, they seem to be rebounding pretty quickly because investors have enough confidence to expect future growth. It’s really when investor confidence erases completely when things selloff, and continue to selloff without a bottom in sight — this is when we see crashes occur.
Multiple notable bubbles have been created and popped in less than 10 years in the finance world, so seeing this happen here with oil shouldn’t be a total shock to everyone. Some examples of these include: U.S. real estate in 2008, precious metals in 2008 and 2011, the U.S. stock market in 2008, and oil in 2008 and now again. When crashes come around, which as I’ve pointed out, do happen, all the steam of forward momentum gets sucked from the engines propelling price action forward.
In the last few months during the most recent crash in the oil sector, it crept up on everyone slowly as it fell below $100, then down into the lower $90s, and then lower until it started to really have some major percentage moves down just as we’ve seen this week. Up until the point everyone realized oil was crashing, people just assumed to wait it out and give it a chance to gather its bearings, and snapback to where it seemed to sit well at $100 plus.
Could Oil Prices look like the last 4 years in Precious Metals?
Overtime, I think most people agree that oil will be back at these price levels. Considering many economies balance their budgets around these prices, it’s in the interest of OPEC for oil eventually to climb back over $100. Precious metals have been in a severe bear market since 2011, and since our most recent experience with a commodity was negative, it’s logical to think it could be as bad for oil too.
Although I do believe oil could get worse, my assumption is that it won’t be as long-lived as the precious metals bear market. As we know, both the prices of precious metals and oil are controlled by governments and entities that have interests directly or indirectly to the price of the commodity. Precious metals is touchy for the governments because in many cases, it’s a gauge on the health of the currency, and if precious metals skyrocket it’s symbolic of a declining dollar, which is bad for the bankers and other government blended entities who benefit from the system the way it is.
Countries like Russia, Saudi Arabia, Venezuela, Iran, and Kuwait depend on oil prices to be high enough to be able to pay their bills and continue their operations. Even the U.S. to a lesser extent will feel the pinch of the falling oil price if companies can’t afford to withstand prolonged price depressions. As opposed to precious metals, it’s in the interests of the governments to have a higher oil price and not watch it collapse to nothing. This is in stark contrast to precious metals which we’ve seen the governments go to war with, by research done at GATA.
I do think it can get bloody over the next few months, I do not see this being a prolonged extended depression in this commodity. There are too many big powers in the mix that have their interests aligned with higher prices, and it will inevitably go where they want it to.
Chief Editor at CrushTheStreet.com