Bill Baruch, president and founder of Blue Line Futures, previews E-mini S&P, Gold, Crude market...
Crude Is Overdue for a Correction…
11/17/2009 11:11 am EST
Curtis Hesler, editor of Professional Timing Service, says oil prices may slip a bit after a nice run, but supply and demand and a weak dollar will ultimately push them higher.
Crude is way overdue for a correction. Prices got overextended, partially because of outsized bullishness concerning the economy. The economy is not in recovery, regardless of the stuff you are being spoon-fed by the media.
Crude oil is a global issue, factors of which vastly overshadow our domestic problems. [So,] although per capita energy use may moderate due to the recession, there are more folks immigrating and being born in this country every day. In fact, America grows by one Chicago every year, and all those additional folks need energy. Virtually everything—absolutely everything we use and need—requires crude oil in some form.
On the other hand, supplies are being curtailed by depletion and lack of investment. New supplies replacing depleting sweet crude production are typically sour crude, and that is more expensive to process.
The Cantarell Field in Mexico (a major US supplier) is where the lion’s share of Mexico’s output is produced. It continues to decline drastically, and it will not be a surprise if Mexico discontinues exporting oil within the next 18 months.
As worldwide population increases, as economies in Asia continue to grow, and as crude production stymies, the price of crude will rise. The dollar is no small factor in this. Crude will not always be priced in dollars in the international market. That is changing; but as far as you and I are concerned, it is and will be priced in US dollars. As the dollar continues its journey lower, crude oil and other raw materials will increase in price in US dollar terms.
Near term, though, I see the likelihood of a dollar bounce here, regardless of whether [the dollar index] is able to hit our Rydex number of 77.74 or not. As the dollar strengthens temporarily, crude will briefly come off as a consequence.
The current rally and recent positives in some of my models requires a new look at support levels. On the down side, there is now minor support at $72.00-$74.00 [a barrel], but I am expecting more weakness than that. A more realistic downside target would be $68, basis December futures.
The important point is that crude is going to correct, and if so, energy stocks will follow suit. Longer term, I think crude will most certainly reach $100 next year, and it will likely top $130 by year-end 2010. Of course, this is going to add force to the next leg of the recession.
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