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The Oil Game

Posted December 24, 2015

The price of oil is at a critical juncture. In fact, it is on a knife's edge.

For over a year now, I've been telling you that oil was headed to $33. I was laughed at and scorned but ultimately vindicated. There is simply too much oil in the world.

The Saudis are pumping at capacity to gain market share and cause fiscal pain in Iran and Russia.

Russia is pumping more oil that it ever has due to investment in new technology and systems from the excess cash it had when oil was above $100.

The rest of OPEC is pumping to meet basic, eroding budget demands.

And here in the good ol' U.S.A., we pumped the third most in the world at 9.3 mb/d.

russianoilproduction smallClick Image to Enlarge

Here is the chart showing that we are nearing the support level/bottom from 2009. The question is whether or not oil will bounce from its five-year lows or slice through them. As I write this, we are at $34.66.

opc111

Lets step back a bit and see where we are the oil price cycle.

Here is the list:

Up Cycle:

  1. Easing monetary policy/rates drop
  2. Economic expansion
  3. Oil demand rises
  4. Oil prices rise
  5. Oil exploration and production increases

Down Cycle:

  1. Oil prices fall
  2. Credit peaks/money tightens/rates rise
  3. Economic contraction
  4. Demand falls
  5. Oil exploration and production fall

Right now we have record-high oil production, and oil prices are falling. Rates are going up in the U.S., and credit — at least for oil companies — has peaked. Demand is ticking upward, but major oil trackers like the IEA and its brethren think oil demand will slow down in 2016 based on China's easing GDP growth.

So if you believe this cycle list, we are somewhere between three and four in the down cycle. We have seen exploration dry up, but we have yet to see production fall.

The second question is at what point will the price of oil be so low that it will spur economic expansion and increase demand? And at what point will it be time to buy these beaten-down oil companies?

Make no mistake; those that buy at the bottom and hold on tight will get rich.

You have to remember that during the last up cycle in oil, companies like Petrobras (NYSE: PBR), the Brazilian oil giant, went from $4 to $78.

pbr111

Yesterday, PBR traded at $4.23.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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