Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
Oil; black gold. Oil is the global economy's lifeblood. Without it, the global economy would probably return to the 17th century or worse. Oil demand just keeps going up. It is a constant battle to find new sources and keep what resources there are. Everyone is competing for it and wars have been fought over control of it to this day. It is undoubtedly the most political of the commodities.
At one time, there were constant stories about how the world was running out of oil. The stories were right. The world did run out of oil - cheap oil. In 1998, oil was trading for about $12/barrel. That was it for cheap oil. Over the next ten years, oil prices rose eventually reaching $147 in July 2008. Then came the financial panic of 2008 and oil prices had their own panic collapsing to about $34 in six months. The oil market was in complete disarray. But the low prices didn't last long and by early 2011 oil prices were back over $100.
It took oil prices reaching $100 and largely staying there that helped increase oil supplies as new resources were found deep under the ocean, in the high artic, from shale fields and oil sands. There is a lot of oil there but it is expensive to get it out and the environmental dangers are high often extremely high. But the world needs oil and oil demand keeps rising every year. Today the world consumes roughly 90 billion barrels a day. Demand grows at roughly one million barrels a day year over year. The oil is not running out. The cheap oil has run out or is running down or is under stress.
Where is the cheap oil? The Middle East still holds the largest reserves and the most easily accessible oil. But the Middle East is also the world's most volatile place that holds oil. The Middle East holds roughly 56% of the world's reserves. And much of those reserves are the light sweet crude that is most prized. Canada has the world's third largest reserves but a lot of is in the oil sands or it is heavy oil. Much of Canada's oil is landlocked so the difficulty is how to get it to markets. In parts of the Middle East, the oil just oozes out of the sand. The markets are easily accessible. Roughly 20% of all the oil traded in the world goes through the Straits of Hormuz from the Persian Gulf that passes between Iran and United Arab Emirates. It is the world's most strategically important choke point.
Many of the countries that are experiencing wars or turmoil are in the Middle East while others are in North Africa. Some of those countries include Iraq, Iran, Libya, Syria, Yemen, South Sudan and Nigeria. Iraq is slowly descending into chaos and could become completely ungovernable. Iraq produces or used to produce according to the EIA 3.4 billion barrels a day, the world's 7th largest producer. But that number is falling rapidly because of the current turmoil. Iraq has an estimated 143 billion barrels of reserves but if their oil industry could be developed, the actual amount of reserves could be two, three or four times that amount.
In 2003, the US invaded Iraq ostensibly because their dictator Saddam Hussein had weapons of mass destruction (WMD). Iraq had faced sanctions for years stemming from Gulf War 1 in 1990. Iraq was threatening to ask for payment for its oil only in Euros rather than US$ as was the accepted norm. The US$ has been called a petro dollar since the oil crisis of the 1970's. Former Vice President Dick Cheney when questioned about the cost of the war declared that the war would pay for itself because of the oil once Iraq got back to full production. Dick Cheney was the former CEO of Halliburton (HAL-NYSE) a company that benefitted considerably by the war in Iraq and continues to do so today. Halliburton is one of the largest operators in Iraq today and one of the most significant and largest oil field services companies in the world.
The current insurgency in Iraq is a threat to who controls Iraq's oil. The Kurds it appears have taken control of the oil in the North of Iraq in Kirkuk while the ruling Shias still control the huge Basra oil fields in the south. However, the insurgents known as ISIS have seized control of the oil fields of Mosul as well as refineries. Numerous foreign companies have considerable assets and interests in the oil fields of Iraq. Some of those companies include BP (UK), Shell (Netherlands), Lukoil and Gazprom (Russia), Total (France), CNPC and CNOOC (China) and Exxon (US). Some foreign companies have already had to curtail operations and send staff home because of the turmoil in Iraq.
The fear is that turmoil in Iraq might spread into other countries. Iran could become involved on the side of the Shiite government in Baghdad. Iran is a Shiite nation. Saudi Arabia is apparently behind the funding of ISIS. ISIS is Sunni as is Saudi Arabia. ISIS itself came over from Syria where a civil war has been raging for the past three years between Sunni insurgents and the government of Bashar Assad who are Alawite/Shiites.
The fighting from Iraq and Syria has threatened to spread into Lebanon and Jordan. Into the mix comes Israel who has clashed with the Shiite/Alawites of Assad. Caught in the middle of all of this are the foreign corporations operating in Iraq. Threats to foreign corporate interests could result in foreign troops coming into the country to ostensibly work with the Government of Iraq but their main purpose could be the protection of foreign assets. The US has sent upwards of 300 military advisors to Iraq. The Iraq and Syria civil wars are threatening to spread out over a number of countries and potentially involve the major powers particularly the US.
The long-term chart of oil is an interesting read. The first thing that stands out is that there was a major low made in 1986. The next major low was in 1998 some 12 years later. The next huge low visible on the charts is the financial panic low of 2008, which came 10 years after the 1998 low. This suggests there might be a 10-12 year cycle. There is insufficient data to say for certainty that this cycle might exist but it is a consideration. The next one could be due anywhere from 2018 to 2020.
Oil prices appear to be forming a potential ascending triangle over the past few years. The high thus far in this pattern was at $114 in April 2011. The current top of the pattern is near $111 and a breakout above that level could suggest a major move to the upside. If the pattern is correct as an ascending triangle a breakout over $111 could suggest a move towards the top of the major channel currently near $148/$150. If oil prices were to move those levels it could be suggesting that the situation in Iraq deepens. Persistent high oil prices would also threaten the fragile global recovery.
The huge pattern from 1980 appears as a huge ascending wedge triangle. Normally that is a bearish pattern. The top of the channel hooks the 1980 top up with the top of 2008. The bottom channel starts with the 1998 low and runs along the low of 2008. The top of the channel is currently near $190 while the bottom of the channel is currently near $80. There appears to be considerably more latitude for a sharp rise in oil prices as opposed to any down move. If the ascending triangle pattern is correct there appears to be considerably more ability for oil prices to rise within the triangle.
The turmoil in Iraq and Syria are civil wars that are threatening to spread into other countries and drag in foreign powers. In the middle of this sits some of the largest oil reserves in the world and one of the major choke points for the shipment of oil. If oil prices were to rise further because of a further deterioration of the conflict in the Middle East it could become a major problem for the world economy.