by Bill O’Grady
Over the past year, oil prices fell sharply into the first quarter, remained rangebound from January through March, rallied above $60 per barrel in the spring and early summer, and then slid to new lows in August. Recently, we have seen a sharp bounce in prices; in fact, it is the fastest recovery since August 1990, when Saddam Hussein invaded Kuwait.
The decline from late June into late August is probably discounting the normal seasonal demand weakness that occurs after the summer ends. Refineries usually engage in extended maintenance during autumn which reduces oil demand. The recent rally looks like aggressive short covering. The sub-$40 lows will probably hold as the lower end of the trading range into early winter. From there, we would look for a retest of the upper end of the range. It is always important to remember that cartel markets tend toward trading ranges as the supply behaviors lead to price stability. We are probably entering a $60 to $40 dollar trading range. Could we break down below this range? Yes, because it isn’t clear that OPEC will take steps to defend that level. However, some of the recent rally was due to rumors that OPEC was considering steps to support the market. Around $40 dollars, demand would be expected to improve. So, for now, our stance is that we are creating a price range and until we see strong evidence to the contrary, we expect it to hold.