Hi @BaconSandwich, you are looking at the same graphic and support level that I was pointing to above in post 394, but you have taken it back even further.
Although this chart highlights a support range, I think the oil markets are beginning to find themselves in a tightening pincer between forced restraints on potential over-supply and diminishing demands caused by trends other than just economic slowdown. I think there are major structural changes kicking in here, which are only just starting but are likely to gain significant momentum in the coming years.
Although it might look like this zone is a purely technical support level based on previous dips in the charts, I think this zone is actually based very much of the fundamentals of the oil supply side. There are many producer nations and companies whose breakeven costs are already above this zone or within it, and even those companies who can still make money at lower prices are not far off their B/Es at these price levels for the benchmarks WTI and Brent.
But whilst this might put pressure on oil companies to slow down the supply, they still have to produce revenues and meet the expectations of investors. Shale oil in particular apparently requires a constant flow of fresh capital and the useful life of shale wells is considerably shorter than in the traditional oil fields.
We know already that the OPEC and non-OPEC allies, led by Russia, want higher prices and are prepared to cut back on production levels in order to try and achieve them. But the US is more than capable and more than willing to take up any slack resulting from OPEC reductions. It has even been suggested that the US could eventually be producing as much oil as Russia and Saudi Arabia combined.
This all means that the supply side dynamics are very different to what they were in earlier years when we lived in an era of fears of oil running out and any perceived shortfall pushed prices through the roof. Even earlier this year, when prices reached over $70 there were predictions of when we will hit $100. It never happened…
There is no talk any more of oil supplies being exhausted or exorbitant prices as we need to drill for the more costly oil reserves as the cheaper ones run dry. Instead we have ever growing reserves in the US and elsewhere, both onshore and offshore, which are easily and cheaply reachable.
When we combine this with the held back potential from OPEC+ we see a market that can and will respond with a progressively and proportionately speedy overdose of supply whenever prices start to move up. In other words the bottled-up supply just waiting to be pumped into the market will automatically be released into whatever increases in demand may appear and thereby place a cap on prices.
In addition, the OPEC+ countries are not going to allow their market share to be whittled away by the US and other producers outside their production cut agreement, and will immediately turn up their production once prices are seen to be firming.
But that is only the supply side.
On the demand side we are seeing signs of economic slowdown on a global scale, which is always a major negative for oil markets. But there are other issues as well.
I believe we are at the start of a major push away from oil-based products. EVs are making a fast entry into the transport market and not just for private cars. Haulage and even air traffic will soon include alternative fuels. Diesels are already hearing the doom bells ringing and virtually every car producer is planning more and more electric and hybrid versions - and even the traditional combustion engine is consuming petrol on a much more efficient basis. Once the charging infrastructure and battery efficiency issues are improved we should see a rapid change in the dynamics of transportation.
Environmental issues are also placing greater pressure for substitutes for hydrocarbon-based plastics and creating a growing awareness amongst consumers of a need to reject/recycle plastics as much as possible. Crude is used in a huge number of products in addition to just fuels and we could see a significant reduction in these applications.
But none of these things are going to happen “tomorrow” but, as we know, markets move on might happen and not on what is happening now or yesterday.
I still believe oil is going to provide some excellent trading opportunities in the nearby years to come but maybe there will be less extreme projections amongst the market commentators as (and if) this pincer effect between floor-level production costs and the constant potential supply just waiting to be pumped in the market whenever the profit is sufficient, gradually gains its momentum and visibility.
I guess that was my New Year “speech”