CRUDE OIL - WHO TO BELIEVE?
by Ron Griess
Proprietor, The
Chart Store
www.thechartstore.com
April 6, 2005
In our July
21, 2004 Observations, we posted a series of inflation-adjusted
crude oil charts and asked the rhetorical question: “Could the
break out be for REAL?” Fast forward to March 31, 2005. The
financial press was full of headlines and stories reporting that
Goldman Sachs was suggesting that crude oil could SPIKE to $105
a barrel. Remember that date, March 31, 2005. Today, April 4,
2005, the financial press is reporting that
a senior analyst at IFR Energy
Services in New York believes oil prices could plummet to $28 a
barrel as early as this summer. Who to believe??
Here is an
updated chart of crude oil adjusted for inflation by the
Consumer Price Index.
Chart
1 Notes:
-
At the
risk of being repetitive, here is what we said last July:
The “real” price of oil peaks in 1980 with a secondary peak
in 1990. Whereas nominal price bottomed in early 1986 with a
secondary bottom in 1998, the “real” price bottomed at the
end of 1998 for our chart. We have added a simple downtrend
line (in orange) to the chart to show the decline of “real”
prices from 1980. The horizontal blue line demonstrates the
top of the broad trading range of nominal prices.
-
Crude
oil did indeed “break out,” and we would suggest that our
up-sloping orange trendlines form a channel of expected
price movements.
On the
following chart we have added two circles of the widely quoted
price targets.
Chart
2 Notes:
-
The
target of $105 seems to us to be outlandish. Yes, commodity
prices do spike up and down, and often in very short time
periods. Without a major, negative news event, we feel a
target of $105 should be summarily dismissed.
-
The
target of $28 is slightly below our up-sloping orange
tendlines. More reasonable. Until our trendlines are
violated on either the upside or downside, we would prefer
to use them as our guide of future price fluctuations.
Summary Points:
-
The
financial press has been reporting widely divergent
forecasts for crude oil prices.
-
The
Goldman Sachs forecast of $105 was reported on March 31,
2005. Hmmm, could it be that the old “mark ‘em for the end
of the month” trick is now being used for commodity markets?
-
Extreme
forecasts rarely come true, but then, only time will give us
the answers.
© 2005 Ron Griess
Originally published as TheChartStore.com "Observations" on April 4,
2005.
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