Not even a 60+ percent decline in Crude Oil prices from all-time highs is apparently enough to convince OPEC oil ministers that further production cuts will be necessary to prevent Oil prices from tumbling. At the emergency meeting in Cairo, Egypt on Saturday, OPEC ministers agreed to wait until their next scheduled meeting in Oran, Algeria on December 17th before deciding on any additional production cuts, preferring to see if the 1.5 million output cuts announced last month will have any effect on prices. Weak oil demand by western nations as well as Japan, which are mired in a recession, is the key factor to the rather unexpected tumble in Crude prices this year. There are even some analysts calling for a decrease in world oil demand in 2009, which, if true, would be the first year-on-year decrease in demand in over 25 years. Even if OPEC agrees to further production cuts in its December meeting, actual member compliance to their official quotas would be needed to have any meaningful effect on supplies. Additional cuts by non-OPEC oil exporters such as Russia, Norway and Mexico would also be supportive to oil prices, but are not guaranteed by any means -- especially from Russia, who may need all the oil revenue it can get to keep its own economy functioning. So how low can Oil prices go? Well it was not too long ago, a mere 10 years back in 1998, that Oil prices approached $10 per barrel, as the Asian financial crisis combined with OPEC indecision on quotas among its members allowed Oil prices to plunge to this currently unthinkable level. While there is no way to know if Oil prices can reach this level in 2009, traders should be aware of the history of Oil prices and the extreme moves that can occur.
Looking at the daily chart for January Crude Oil, we notice prices have started to stabilize a bit after making contract lows of $48.25 back on November 21st. Since that time prices have rallied nearly $8 per barrel, mostly due to short-covering buying tied to an improvement in the equity markets of late. Despite the recent rally, prices still remain below the 20-day moving average and a close above this widely watched indicator would be needed to spur additional short-term momentum buying. The 14-day RSI has moved out of oversold territory and now reads a more neutral 40.0. $50.00 looks to be minor support for January Oil, with the contract lows at $48.25 acting as major support. Should the recent price recovery continue, the 20-day MA at $58.32 looks to be the next level of resistance, with $60 acting as major psychological resistance.
Mike Zarembski, Senior Commodity Analyst