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Oil Prices Could Be Setting to Drop This Year

Investors beware: oil prices could be tumbling in 2018, and there could be major losses ahead.

Certainly, the call for oil prices dropping sounds bold, but this is not based on gut feeling. There are several reasons why oil could drop in value.

First and foremost, look at the chart below. Technical analysis is foretelling a bearish outlook for oil prices.

Pay close attention to the blue line drawn on the chart. The blue line represents the 200-month moving average. This moving average is deemed as a very long-term trend indicator. If the price is trading above that moving average, it means the long-term trend is pointing upward. If the price is trading below that level, it means that the long-term trend is pointing downward.

(Click on image to enlarge)

Chart courtesy of Stockcharts.com

You see, oil prices dropped below their 200-month moving average in early 2015. Then they tried to bounce back, but failed. When this happened, we saw a massive move to the downside that took oil to below $30.00

We now see the oil price trading very close to this moving average again. And, over the last few days, they have been struggling to move above this moving average. This is a bearish sign, telling us that oil prices could plunge.

Oil Market’s Supply and Demand Disparity

Beyond the technical analysis, look at the basic economics of the oil market: supply and demand.

We currently see the supply side gaining a lot of strength. One country that oil investors need to pay attention to is the United States. This shouldn’t be news to regular readers of Lombardi Letter.

Consider this: just recently, the U.S. Department of Energy said that the U.S. could be a net exporter of oil and gas by 2022. This is four years earlier than was previously forecasted. Why? Because there’s a production boom in the country. (Source: “US will be a net energy exporter by 2022, four years sooner than expected, Energy Department says,” CNBC, February 7, 2018.)

Mind you, this is unprecedented if it actually happens. The U.S. has been known as a major energy consumer. In just a matter of few years, it could be exporting oil!

On the demand side, investors must understand this: we are coming off a period of very low interest rates. Central banks around the world are talking about raising rates. The Federal Reserve and few others have started to raise them, and don’t be shocked if several others follow.

Economics 101: high interest rates could impact economic growth. This could, in turn, mean a lower demand for oil.

Oil Prices Outlook for 2018: Things Could Get Ugly

Dear readers, don’t ever forget that when it comes to the commodity markets, supply and demand matters a lot. As I see it, we have a lot of supply, but demand could be tumbling soon. As this is happening, technical analysis suggests a lot of bearish sentiment. So, don’t be surprised if it all gets much uglier later in 2018.

Keep in mind, if oil prices go down, oil companies will see their profit margins get thin. They could face a lot of scrutiny in the midst of all this. Oil company stocks have already declined by 13% since mid-January. If oil prices were to tumble 15–20% in 2018, oil stocks could drop much more in value.