Two days ago, Iran successfully test-fired long-range missiles. According to the BBC, “The Revolutionary Guards tested the Shahab-3 and Sajjil rockets, which are believed to have ranges of up to 2,000km (1,240 miles). The missiles' range could potentially permit them to reach Israel and US bases in the Gulf, analysts say.”
With aggression up in the Middle East you would expect oil prices to be flying… But they aren’t.
This is because the fundamentals of oil point down. The world is now awash in crude. We simply don’t need Iran’s 2 million barrels of oil a day. Saudi Arabia has enough spare production to replace Iran’s 2 million barrels – twice over.
And global demand is dropping. For example, Japanese crude imports fell for a seventh month in a row, dropping 12.4% in August.
The only thing holding up the price of crude has been the falling dollar and the fact that the Chinese were stockpiling. The dollar has hit a support level and China now has 30 days’ worth of imports sitting around in silos.
The U.S. has 94 million tons of oil reserves, or enough to cover 56 days of net imports. And last week the government came in with a larger-than-expected surplus.
This basic supply and demand structure was enough to push crude oil futures down overnight in London.
According to The Wall Street Journal, “Prices declined as market participants shifted their focus back to fundamentals, which have undermined recent hopes for economic recovery.”
"Stocks are high and demand is low, so why is the price so strong," an oil broker in London was quoted as saying.
The November Brent contract was down to $64.94, while in New York it was down to $66.26 a barrel.
The first reason oil will fall is fundamentals. The second reason is that tension in the Middle East is bearish for oil, because it is beneficial for the U.S. dollar.
Any situation that makes people move their money into safe investments will push the dollar up. There is nothing safer than a T-bill.
The third reason oil is going back to $30 is that the chart is breaking down…
It’s time to sell your oil plays and buy a Hummer. I like yellow myself.
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