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Crude Oil - Who to Believe?

This commentary was originally posted at TheChartStore on 4th April 2005:

In our July 21, 2004 Observations, we posted a series of inflation-adjusted crude oil charts and asked the rhetorical question: "Could the break out be for REAL?" Fast forward to March 31, 2005. The financial press was full of headlines and stories reporting that Goldman Sachs was suggesting that crude oil could SPIKE to $105 a barrel. Remember that date, March 31, 2005. Today, April 4, 2005, the financial press is reporting that a senior analyst at IFR Energy Services in New York believes oil prices could plummet to $28 a barrel as early as this summer. Who to believe??

Here is an updated chart of crude oil adjusted for inflation by the Consumer Price Index.

Chart 1 Notes:

  • At the risk of being repetitive, here is what we said last July: The "real" price of oil peaks in 1980 with a secondary peak in 1990. Whereas nominal price bottomed in early 1986 with a secondary bottom in 1998, the "real" price bottomed at the end of 1998 for our chart. We have added a simple downtrend line (in orange) to the chart to show the decline of "real" prices from 1980. The horizontal blue line demonstrates the top of the broad trading range of nominal prices.
  • Crude oil did indeed "break out," and we would suggest that our up-sloping orange trendlines form a channel of expected price movements.

On the following chart we have added two circles of the widely quoted price targets.

Charts 2 Notes

  • The target of $105 seems to us to be outlandish. Yes, commodity prices do spike up and down, and often in very short time periods. Without a major, negative news event, we feel a target of $105 should be summarily dismissed.
  • The target of $28 is slightly below our up-sloping orange tendlines. More reasonable. Until our trendlines are violated on either the upside or downside, we would prefer to use them as our guide of future price fluctuations.

Summary points:

  • The financial press has been reporting widely divergent forecasts for crude oil prices.
  • The Goldman Sachs forecast of $105 was reported on March 31, 2005. Hmmm, could it be that the old "mark 'em for the end of the month" trick is now being used for commodity markets?
  • Extreme forecasts rarely come true, but then, only time will give us the answers.

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