Prepare for crude to spike back hard

January 29, 2015 07:42 AM

Crude oil prices are trying to balance record supply of oil and dwindling storage space versus what could be the biggest drop in energy capital spending cuts in history. Royal Dutch Shell said it would cut spending by 15 billion over the next three years and its chief Executive, Ben van Beurden, signaled that he may cut spending even more if he felt it was necessary. With more earnings coming and many more billions of capital spending cuts soon to be announced, is oil going to start to look ahead to the price spike that almost certainly is going to be in our future.

When prices plummet as fast as they have been doing so recenly there are always consequences and we are starting to see that. It also means that when prices finally bottom we should see prices spike back hard. According to data provided by Price Asset Management, and soon to be available in a special energy report from Jim Nolan and myself, history would suggest that prices of oil usually come back quicker than most people think.

In fact, usually the bigger the break in petroleum percentage wise the bigger the rebound in just 12 months. In 12 data points when oil had a break of 40% or more within a year the market rallied back 52.8% within 12 months. Even when the break was only 30% with 20 times the rebound was still a very impressive 45.5% within 12 months. This snap back comes usually as the market realizes that a period of low prices will stimulate demand and cut backs in production will take their toll.

Yet while the prices may spike back talk of $200 barrel oil as predicted by OPEC Secretary El-Badri seem too far out there. The truth is that with the growing contango and massive supply the cost and availability of finding storage will add to cost but buffer some upward pressure when demand reappears. More than likely oil will recover back to the 70 to 80 range within 12 months.  

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.