The Case For Higher Crude Oil Price

July 10, 2016

Arguments for Higher Crude Oil Price

In US judicial court system for a criminal case, the juries are advised to examine the evidence of the case “beyond a reasonable doubt”.  The market behavior is complex and there are often good arguments on both sides as to the direction of the crude oil ($WTIC) price that will go.  Recent publications by commodity analysts at J.P. Morgan Chase and Citicorp indicated that the crude oil has not reached the bottom and may go down to below $26/bbl. On the other side, seasoned oil investors including T. Boone Pickens and others believe the bottom has already been set…and consequently, the oil price will go up this year.  

In this article, we study the crude oil price from the technical perspective and conclude with:

Reasonable Evidence:  Crude Oil will rise from the recent low of $26/bbl to a high of $70 or more by end of 2016.

We use two broad approaches:  (1) higher crude oil price by association with similar assets; (2) higher price from cycle analysis.  We strongly believe in technical analysis and that the price often tells the story and gives the future direction with confidence.

Higher Price by Association

We examine crude oil price in association with US Dollar Index (USD), hard currency (Gold) and the equity market (DOW Index) - and finally the broad commodity (CRB) index.  All these four items are highly correlated with crude oil price.  The following table summarizes the four asset correlations, followed by individual charts:

  • All four correlation coefficients are either above or below 0.5, which are considered statistically significant correlations.  When the two assets move in the same direction, the coefficient is positive.
  • We use the inverse of US Dollar Index for comparison with crude oil price.  If we use USD, the correlation with crude oil will be a big negative value of -0.97.  This is commonly known as the petro-dollar trade in crude oil.

Each of the charts below tries to answer the question:  if the associated asset price to oil price is going up, what will be direction of oil price?

Crude Oil And US Dollar

Oil is a very important commodity that drives the global economy in transportation and other areas.  The price is for a very long time denominated in US dollars. This petro-dollar may not hold in the far future.  For now the crude oil price is still highly correlated with the US Dollar Index.   Here in the chart we use and compare the inverse of US Dollar Index (1/USD) with Crude Oil (WTIC):

  • Since we expect the USD inverse to rise in the future, because of Fed’s QE and the foreign countries dumping of US Treasuries, we also expect oil to rise.  The case for lower USD has been published on this website. These two assets (USD inverse and WTIC oil) have a very high correlation of 0.97!

Crude Oil And Gold

  • Gold has emerged as a world currency reserve as an alternative to US dollar.  Witness the hoarding of gold by major central banks in China and other countries in recent years. In numerous articles published on this website, we have forecast the explosive nature of gold rise beginning in 2016. 
  • The generational gold bull market started in 2000.  After a 4-year correction, the gold bull has now resumed.
  • We expect the crude oil price to rise from the recent bottom of $26 in 2016 - and continue for several years.  Simply said, the inundation (i.e. devaluation) of paper currencies lift up the prices of all commodities.

Crude Oil And DOW Index

  • Do we believe that the DOW Index will continue to rise?  Unlikely.  At best, meandering if not a severe crash later this year.  As many commentators said, QE4 is on the way.
  • As oil and DOW have a negative correlation of – 0.60, we expect crude oil to rise as DOW declines.

Crude Oil And Commodity CRB Index

  • It is not surprising that crude oil (WTIC) and general commodity (CRB) index are highly correlated, as crude oil forms the largest component (23%) of CRB Index.
  • We expect all commodities will rise in price in the near future.  Again, this general value increase is not caused by the fundamental global economic growth.  The principal reason is the global massive printing of paper currencies by all major countries in recent years.  The commodities are like boats floating on the sea, and all are rising with the rising tide.

Evidence from Fourier Cycle Analysis

Using a 30-year data series of monthly crude oil (WTIC) price, we perform a detail Fourier cycle analysis of WTIC.  The internal cycles thus determined allow us to project the near-term price of crude oil, as shown in the chart below:

  • The crude oil price will likely rise to $70 by end of 2016 and peak at $160 by early 2018.
  • The two major internal cycles are: 21 years and 5.67 years.

Higher Price by Mary’s Rule

Finally we make the case for rising crude oil price with the Mary’s rule observation.  Mary’s rule was discussed in our earlier article.  As crude oil is a tangible commodity like gold, the crude oil bull market which started in 2000 will resume its rise to about 2020.

Summary

We have made the case that crude oil has reached its bottom of $26/bbl in beginning of 2016 - and will rise to about $70 by the end of this year. Of course, all the traditional linkages may be broken in this tumultuous world.  In that case, crude oil will head higher than $70bbl!

Caution:  We are not professional fund managers.  Do your own research and consult financial managers for investment advice and help regarding energy related investments.

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F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets.  He holds a PhD degree in physics and has done technical analysis of the market on the side for many years.  He welcomes constructive discussion and can be reached at:  ftdao245@gmail.com  , ftdao245@comcast.net

One cubic foot of gold weighs more than half a ton (1,306 pounds).