Basic Economics Could Send Oil Prices Tumbling 25%-30%

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The case for lower oil prices continues to get stronger. If you hold oil-related investments, this might be the time to rethink your stance.

There is basic economics at play in the oil market that foretells lower oil prices: demand and supply.

You see, over the past few months, oil prices were surging on one factor alone. It was that the Iranian oil supply could be impacted in the wake of the U.S. pulling back from the agreement that was done under the Obama administration.

Just recently, President Donald Trump said something that was unexpected by many.

“I would certainly meet with Iran if they wanted to meet,” he said. “I do believe that they will probably end up wanting to meet. I’m ready to meet whenever they want to.” (Source: “Trump says he’d meet with Iran without preconditions ‘whenever they want’,” CNN, July 31, 2018.)

This pours a lot of cold water on the theory that the Iranian oil supply will be out of the market. If President Trump is willing to meet, chances are Iran may not be scrutinized as previously expected.

So, as it stands, Iranian oil remains in the market. This means more supply.

Beyond this, we are seeing production soar across the board.

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Don’t ignore the U.S. when looking at the oil market. It’s pumping a lot of oil.

In May 2018, U.S. oil production amounted to 10.44 million barrels a day. Eight years ago, in May 2010, oil production in the U.S. was 5.39 million barrels a day. (Source: “U.S. Field Production of Crude Oil,” U.S. Energy Information Administration, accessed August 2, 2018.)

Simple math: In eight years, U.S. oil production has jumped over 94%.

Here’s a little bit more perspective; the U.S. is currently producing more oil than at any time on the record. It has been consistently rising and is expected to grow further.

However, the U.S. isn’t the only place flooding the oil market with more oil.

Take a map, point to a major oil-producing country, and chances are that it’s also producing more oil.

On the demand side, there’s not much in favor of oil prices.

First, we could be on the cusp of a trade war. If it becomes a full-blown trade war across the globe, it could definitely disrupt demand.

Second, the U.S. economy may be fine for now, but other major economic regions aren’t. China is posting slower growth, Japan remains stagnant, the eurozone isn’t any better, emerging market economies are facing headwinds, and the list goes on. Remember that in times of economic growth, more oil is needed—not when there could be a slowdown ahead.

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Last but not least, oil may not be as needed in the coming years as it was in the past. We are seeing a massive boom in alternative energy like solar. This could dampen the demand for oil severely.

Now let me answer a few questions…

Could oil prices reach $80.00? Yes, it could be possible in the short term. This could happen due to a disruption in supply.

If oil goes above $80.00, could it go higher? No. It’s very difficult to see oil prices soar much above $80.00. You could thank several factors for this. For example, the technology to extract oil has gotten better. If oil prices soar, don’t be shocked to see companies producing more to cash in on reserves.

Where could oil prices really be headed? If we were to follow simple economics, the answer is very simple: Down.

I am not ruling out oil prices dropping below $50.00—about a 25%-30% drop from where the price per barrel currently sits.

If you hold oil-related investments, they could be impacted significantly if oil prices drop.

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WTI seasonality chart

WTI technical chart plus Forward Curve

Commodities have been trashed this year — maybe because global slowdown fears.

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