Crude Oil Projection and implications

I have noticed a head and shoulders bottom breakout in crude oil. See chart below. I did a graphical projection of the breakout to produce a future price target of $85.50. The projected price is estimated by making the height above the neckline at the breakout equal to the price that the bottom is below the neckline. See vertical construction lines. This is about as good an estimate as any and probably wrong.

The worldwide consumption of oil is about 100 million barrels per day (100m bpd). About 100 days supply remains in pipelines, ships and storage tanks. The extra $35.5 compared to the recent average oil price of $50 represents a liquidity drain of $355b to working capital. The extra oil cost also represents an out of pocket expense hit to consumers around $1.3trillion per year. Total hit $1.655trillion with an ongoing $1.3trillion per year hit. (US trillion = 1,000 million)

The size of this drain could mean that the market going forward won't look like the market we had last year. Energy producers will get richer and consumers will get poorer. If it is true that 70% of the economy is driven by consumers, the economy will suffer. I expect a significant rotation if all of this plays out: Energy up, Tech down. Not sure what happens with inflation as this drawdown is being counterbalanced by US taxation policy stimulus with the central banks being the wild card.

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Thank you Mike.

Indeed, higher oil prices will be a negative for consumer spending. It should also be a negative for Refiners.

Note below that oil stored in the US is shrinking fast. Are oil shale companies going to produce more to meet demand?


Pascal

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