OIL PRICES PREDICTED THRU 2007
by Dr. Stephen Rinehart
June 15, 2004

Background:

The monthly closing prices of West Texas Crude from 1946 were used to see if the major 4-year oil trading cycle was still present in the database. This cycle has been previously correlated with an OPEC strategy (from 1974) of periodically increasing an decreasing the world oil supply and actually produces an corresponding image cycle in other world stock indices such as the NYSE Composite Index. In other words, it appears that OPEC has systematically used a “cut or glut” strategy in the world monthly oil supply to not only create a trading cycle in oil prices (i.e., implications to the oil derivatives market) but also in the NYSE Composite Index. The Fed appears to move in concert with this 48-month oil cycle in terms of interest rate moves (or to anticipate the move). Currently, OPEC is now moving into a “glut strategy” which also fits well into China’s expansion.

Results:

Chart 1 shows the 48-month oil cycle is alive and well in the monthly closing pricing data for West Texas Crude and is currently the largest cycle in the data. The cycle has just peaked (April/May 2004) and is starting downward. It will reach its point of maximum acceleration (i.e., downward influence on world oil prices) about March of 2005. The bottom of this cycle normally signals the start of another major (bear) rally in the NYSE. This is predicted to occur in the March/April 2006 timeframe but this event could occur several months earlier.

Chart 2 depicts the detrended prices of West Texas Crude since 1995 (i.e., when the Fed started to significantly expand the M3 money supply). It appears from this graph that there is a large trading cycle in the oil prices from 1995 and this is indeed the case.

Chart 3 presents a comparison of the actual detrended oil prices versus the 48-month oil cycle. While it is obvious there is a large trading activity at the actual top/bottom of this cycle (possibly OPEC/Fed), the 48-month oil cycle has been dominant in determining the broad waveform pattern in world oil prices.

Chart 4 gives the prediction of world oil prices for the next 45 months (thru 2007). It shows the effect of the 48-month oil price cycle on future world oil prices and there is clearly a strong downward trend coming in world oil prices thru March 2006. That will mark the end of the lowest oil prices in this Millennium because the cycles combine strongly off the bottom in 2006 to form a coming major bull market in energy prices beyond 2006.

Summary:

1. The current trendline in West Texas Crude monthly oil prices shows an average increase of $0.14 per barrel increase per month far into the future. The baseline price of oil in 1995 was $15.84 per barrel.

2. The 48-month cycle is the largest oil price cycle and currently dominates the world oil commodity price. The 48-month cycle has actually been created by an OPEC  “gut and glut” strategy in world oil supplies which significantly affects the NYSE/world stock markets (very successful). This would permit OPEC/central banks to play significant put or call options on world oil prices as well as the NYSE/world equities over the past 20 years.

3. Interest rate moves of the FED correlate highly with the movement of this oil cycle (from 1983) with exception of the last up cycle from 2000 thru 2002. Normally the FED would have raised rates on this move but this would have created financial havoc in world markets. What is the matter Mr. G?

4. Expect the FED to move significantly against the market at some point after the start of a bear rally in March 2006. A high interest rate environment will be initiated by April 2008 if the “out of cycle” pattern continues by the FED. That is, the FED will eventually kill the bear market rally starting in March 2006 probably by a long series of interest rates moves beginning not later than April 2008. Can the FED wait?

5. OPEC (i.e., and central banks) would like the world to believe oil prices are “chaotic” and the world oil supply is threatened by “terrorist violence” against the pipeline supplies/refineries and that higher oil prices are going to be the impending consequence. In reality, just the opposite is true. Rarely are any oil refineries ever attacked in the world (i.e., events in Saudi Arabia may be signaling something else). If the 48-month oil cycle holds up, there is a coming significant drop in world oil prices over the next two years – just in time for the elections and puts by OPEC!

6. By mid-2007 world oil prices will move permanently above $40 per barrel including the effects of US Dollar devaluation at about 3% per year.

7. Rapid increase in world oil prices appears in the long-term prediction starting by 2010 which is consistent with the Hubbert world oil peak in supply and Asian expansion.

8. Petro-Canada is not yet ramping up fast enough in mining oil from the Canadian tar sands in Alberta to protect our US oil interests (ballooning costs which will eventually drive the price of oil North of $70 a barrel beyond 2015 when we really need it) and Congress is useless in defining an “energy policy” in the interests of the public (but so it has been for the past 30 years!).

9. There is a strange drop in world oil prices predicted by this software for 2013 which also follows a trend seen independently(?) in the NYSE Composite Weekly index.

10. World oil prices show a peak in 2012 which may mark the final end (5^th wave) of this secular bear market but the bottom of this bear market will culminate in a predicted coming Mega-Rally beyond 2011(?).

© 2004 Dr. Stephen Rinehart
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