Future of oil prices? Global view for next 15 years!


Dear friends,

The weekend of the first week of March was quite hot. Not because of spring weather but because of surprising movements in the foreign stock markets, Forex and commodity markets. Analysts say unanimously the reason of such a crazy panic is a possible collapse of the OPEC+ alliance, but few understand what this alliance is and why the markets react so painfully to that event.

First, let’s give a definition to OPEC. It’s a cartel which includes 14 oil-producing countries and accounts for 35% of the global oil market, which is not really so much. The rest of the countries that can call themselves “oil-producing” – 30 and a little more – didn’t join the cartel fearing to lose their independence in managing one of their most important income items.

The Russian government became the leader of non-OPEC countries and negotiated with the cartel to coordinate common efforts and control oil prices. As a result, the Vienna agreement, informally called “OPEC+”, was signed on December 10, 2016. The terms stipulated the volume of oil output reduction for non-OPEC countries (there were 11 of them at the first stage).

The intention itself to come to an agreement and cut oil output had been announced in September 2016, when we saw the first price growth (first red arrow). Another 20 countries joined the agreement in 2017 (second red arrow). Those 2 events were the basis of a steady growing trend for oil prices. In November 2017 (last red arrow), there was made a decision to extend the agreement to the end of 2018, which allowed reaching a 4-year price peak of 86.62 USD per barrel.

Then we saw a swift decline by 42% just within a few months ahead of the expiration of agreement as there was no certitude in its prolongation.  That was quite a demonstrative case: it showed how important that agreement was for oil price formation. The situation improved when the OPEC+ agreement was extended for one year more at the beginning of December 2018. In general, the investors were quite confident in stability of oil prices. But…

What happened to oil prices?

The outbreak of the coronavirus  COVID-19 and all the hype around it made stock indexes collapse. The economy of China, the world’s main consumer of oil and other energy resources, was seriously affected because of  shutdowns and sharp export reduction.

https://www.tradingview.com/x/4Ps2cO6u/

Even if in December 2019 the Vienna agreement was extended until the end of Q1 2020 with an additional reduction amounting to 500,000 b/d (first red arrow), the oil price went down amidst the global coronavirus “fever” (this 24% fall is marked in green in the chart above).

Finally, Joint Ministerial Monitoring Committee (JMMC) suggested another reduction of 600,000 b/d starting from Q2 2020.

Russian Federation declined this suggestion. In the absence of an alternative suggestion, there happened the collapse we are observing now (this 41% fall is marked in blue in the chart above).

What will happen next?

https://www.tradingview.com/x/4hfQEu6B/

I won’t do a thorough analysis of the wave structure in this article, but I’ll share my opinion concerning the formation of oil prices which will probably pertain to the next decades. The chart above shows a 6-month time frame with a prospective structure of super cycles (violet waves) and the cycles within that structure (yellow waves).

Analysing the corrective structure that started in 2008, we see the formation of a downward wedge whose breakout is usually equal to the size of the figure’s bottom. Considering the historical peak of 147.68 USD per barrel and the angle of the figure’s upper edge, we may suppose the exit from this figure will happen in 2033-2034. As a consequence, the movements will be located inside a descending wedge for over 10 years, which promises a high volatility and low oil prices with new troughs reached. We need to note here that the 30-year trough of 9.61 USD per barrel will hardly be broken in the long term, but even the current levels aren’t inspiring.

As we’ve seen it in the chart above, the structure of a correction’s supercycle may only be complex inside this wedge. The oil price is forming the second zigzag of wave (y) in the supercycle at the current stage. The lower edge of the wedge is located at 20 USD per barrel, which provides a strong support of the price. As a result, the current oil price has come as close as possible to the important support levels. The zigzag’s development and wave b’s top may retrace at least 61.8% of the last wave (a), which promises a target of around 64 USD per barrel. Then there will be pressure, and another retracement to the lower edge of the wedge may take place.

Fundamentally, this volatility may be explained in the long term with the unsteady geopolitical situation, a possible new escalation of conflict in the Persian Gulf, a possible war between the USA and Iran and an eventual new confrontation between China and the USA. As a result, all this provokes uncertainty and instability in the long term, reduces economic activity and forces active participants to increase reserves and savings to the detriment of investing into long-term and high-risk projects, which will finally slow down the “flywheel” of the economy and result in a recession.

I’d like to remind you that all materials are provided for educational purposes only. They aren’t financial advice and don’t guarantee any profits. All trading decisions you make are your responsibility only.

Take care of yourself and your money!

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Best regards,     

Michael @Hypov

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yordan dimitrov
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yordan dimitrov

Great analysis! Thank you!