The oil prices still plays an important role in global economy and is also a key point of interest to many investors, specualtors and even hedge funds. It was afew month ago when the price of commodities and specially oil have peaked to their all time high. We even heard once that the price of oil will reach as high as $200 a barrel according to a forecast. We used to read stories like "The price of oil will soar again" but what really happened?

But, the oil prices is nearly 70% lower today. The question is what happened and who knows what is going to happen next? Well, first we have to understand the reasons of recent crash in commodities and especially oil prices,

1. As you may know, the Commodity prices reflect future expectations about the global economy. And that,s why, Less infrastructure spending and business activity would means less demand for commodities. As most of you know, we saw the first signs of slowdown in US, UK, EU, Japan and in most parts of the world especially the G-8 developed countries during the last year. Since that time we witnessed a descending trend in demand for commodities, including Oil, Steel, Copper and many others.
2. A big part of huge decline in commodity prices, including the 68% decline in oil prices since its all time-high peak in last july was initiated by the huge commodities sell-off has been driven by fear. In addition, most speculators and hedge funds have been forced to sell what they have bought a few month earlier, to actually raise cash as other markets such as stocks tumble.
3. Oil companies around the world with production costs above $30 per barrel (According to EAI reports) have gained too much profit from recent high oil prices and therefore, have tempting incentives to recover more oil from existing wells, drill additional wells and expanding their production. This increase in supply coupled with lower demand due to slowing economies, led to lower oil prices. However, unexpected fall in oil prices may delay the expanding plans and therefore has a delayed effect on supply.
4. There are also other clear and hidden reasons behind recent quick tumble in oil prices which are quite important for sure. But as most of you know, some reasons will not going to be obvious and published officially. One of these mostly political reasons is the U.S foreign policy toward some of so called " Anti-US" oil powered countries like Iran, Russia, Venezuela. As you may read, there have been done many efforts by US policy makers and authorities to limit the revenue of Anti-US countries which in this case mostly comes from oil and gas and at the same time, the opponents doing the same by creating new cartles like Gas OPEC or even Iranian Oil Bourse to strengthen their controling power and limiting U.S influence in global energy market. This element often playing a hidden but very significant role in the game.
5. Also, changing the seasonal demand of energy can be suggested as a normal element in oil pricing. But considering the current economic slowdown we don,t expect this element to affect the prices that much this year.

However, the current situation for some key commodities are little changed from when prices seen absolutely bearish a few weeks ago. We'll explain in a moment, why commodity prices and especially Oil are set for a considerable rebound and it could rebound faster than markets are predicting. And in a longer term point of view, this is a very huge profit opportunity. Well, let,s get back to the reasons for the suggested soar in oil price:

1. First, despite what we read about the gloomy outlook for the world economy, the World Bank forecasts a recovery in economic growth for developed economies within the next 12 months and It's not just developed economies, the World Bank thinks emerging nations economy will recover as well.
   In addition, the markets are currently pricing in a substantial drop in demand for oil from developed countries. But the IEA predicts that demand won't fall that much as it is very likely to have a 0.5% growth next year, despite the global economic slowdown. That's because developing economies like India and China and some other emerging economies are still growing. even this percentage of growth can support the oil price.
2. Also, the OPEC oil exporters' cartel is getting ready to slash production to boost the oil price. The cartel's president, Chakib Khelil said once afew days ago and warned that “the OPEC will decide a severe production cut to stabilise the oil market.” It is also the biggest ever output cut. So, we think it does matter for the market.
   Also, it's not just OPEC cutting oil production. Russia's president says his country will join OPEC in reducing output to boost prices. This is kind of big news. Because Russia is the world's biggest energy exporter, and this is the first time it is openly talking about coordinating oil cuts with OPEC.
   At the same time, It is Iran which is also a key player in Energy market and still suggesting more cuts and putting pressure on other energy market players to reduce the output further. Remember that the last cut was also suggested by Iranian oil authorities and approved by other OPEC members.
   With demand holding up and major oil cuts looming, the recent drop in the oil price just can't be justified and that is because the oil inventories of key consuming countries like US will have to be re-filled again and that will add to the oil demand soon or later and market will think about the price of the oil again. However, this cut and other possible coming output cuts, may have a delayed effect on oil prices.
3. The third reason is that, According to the EAI (Energy Information Administration), the average cost of finding, lifting, and storing onshore oil between 1980 and 2004 has been approximately $20 per barrel, but between 2004 and 2006 that average cost rose to approximately $25 per barrel and it is slightly higher now. Also, the cost of producing offshore oil is more than double onshore costs. That means any prices below today,s levels of $32 to $40 per barrels will not be satisfying, profitable or even affordable for oil companies to keep their output level as it is currently. So, they will for sure do something to boost the oil price which is their profit.
4. In technical analysis point of view, we see an obvious positive divergence pattern forming quickly. This positive divergence coupled with the extreme oversold and slowing bearish momentum signals a retracement rebound. The retracing price will probably reaches as high as $50 in its first pace which is also the 14% of Fibonacci levels. The next stop could be seen at 23% of Fibonacci which is in comply with the R2 (Second Resistance Level) level around $62 per barrel. Also it is very likely that the 38.2% level of Fibonacci at $78 will be oil,s next stop. Finally, we expect the price to stop soaring below $85 major resistance level and Then we probably witness a side way channel initiating between $78 -$85 levels. Anyway, The price of oil is currently hovering around between $37 and $42 levels but We see that it could easily double by the end of next year just because of the reasons we talked about.

Therefore, we suggest buying oil when the downtrend line crossed over by price upwardly or other helpful price formations like "Double Bottoms" has formed clearly. We also may consider buying other commodities which are in close relation with oil prices. The price of biofuel agricultural products like Maize and suger will go up when the high oil price makes diverting crops into use as biofuels an affordable way to cheaper energy. However, you should be aware that not all commodities will going up when above mentioned elements take place. Gold, for example will deeply depends on the purchase of gold by central banks, possible changing in current uncertainty , the Fx rates of key currencies like USD and many more elements.

S.A Ghafari
Independent Market Analyst

GenuineFX