Cruising Crude

The hottest buzz everywhere in the world today is the crude prices which are breaking their own records every single day and are marching high breathlessly. The crude, that once used to be of just 2.5 USD to 3.0 USD per barrel between 1948 and 1960, the era of post world war, has now breached the $125 mark and does not seem to stop ascending.

But is it possible to rise and rise without a fall? A marathon without taking breath means a total collapse. Surely we won’t have crash in oil prices as the demand is huge but we can expect a roll back sooner or later; and according to me – sooner!

The oil prices are decided at the world’s leading mercantile exchanges like Chicago Mercantile exchange and New York Mercantile Exchange. Here the crude oil is traded as a commodity like steel, lead, wheat, sugar etc. The whole system relies on the demand and supply mechanism and is therefore speculative. The prices soar up with an expected rise in demand or lull in supply and vice versa. So this makes the crude price system a game of emotions and bulls – just like any commodity or securities market.

During the recent days we have seen a slow but constant dip in the world crude oil prices and the dip came even without any additional efforts. In terms of capital markets, a dip in prices that comes without any efforts or news is termed as a technical correction. These technical corrections are generally so profound and accurate that they lead to a business cycle that leads to the real evaluation of the commodity. This is the first and the most easily observed indicator of future trends.

Secondly, in its recent reviews on oil prices, World Bank has said that it expects the oil prices to stabilize in the range of 100 USD to 80 USD per barrel in medium to long term. This means that the banks of banks will stop spending in oil or oil related bonds once the prices will shoot up by ten to twenty percent of its expected ‘real’ price. Following the path of World Bank and International Monetary Fund (IMF), most of the hedge funds that use oil as a hedge against inflationary pressures will shy away from crude. Also, Oil Producing and Exporting Countries (OPEC) has also said in its rarest of optimistic statements that the oil prices “should not cross” $135 mark in short to medium term. This means that the at this point only, the oil prices are at their break even point.

A phenomenon that is still contradicted is that the exponential rise in crude prices, at some point will start affecting the demand and that point will be when the other sources of power will become cheaper than oil. Crude oil prices have already surpassed the prices of LPG, CNG, electricity, coal and other sources and so the demand is likely to soften as people will shift themselves to other sources of power. This phenomenon could take some time to work as the systems and machines have to be adapted or change.

Going by statistics, the great fall of Indian share market occurred when it reached 150% rise in valuations from its 52 weeks low. If the same phenomenon is to be applied to crude oil, the prices must not breach the $125 mark before a big sharp fall. This is often regarded as economics of equalization and doesn’t have much have much logic behind it; but is quite accurate. Considering all these facts and plots, the rise in crude prices is eminent and can’t be stopped as it’s a perishable energy resource, but we can expect a relief of atleast 10 USD to 15 USD per barrel in the coming ten weeks!

Saurabh Sharma

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