Commodity Analysis: Oil Can Hit $70, Too Much Supply, Too Little Demand

Crude oil. This is a tale of way too much global supply and too little demand. Thanks to this crude oil prices are likely to continue slumping. We could see a low of $74.50 to $70 a barrel before all is said and done.

Here is why.

We have a perfect storm brewing, and I am not talking about the George Clooney movie with the same name. The Saudis are doing everything they can to hold onto market share. They are cutting price. We have a strong dollar, which is continuing to gain momentum. Then there is that enormous supply of the black gold. Russia and the Saudis are increasing production. Russian production is now at a post-Soviet era record. Production is above the 15 month demand from China.  All of this could mean lower prices and certainly downward pressure on oil prices.

Please refer to the below Brent crude oil chart. Firstly prices for crude oil futures (WTI), fell to a 17 month low below $90 per barrel on Thursday. As for Bent crude, we hit a 27 month low at $91.56 per barrel in the same timeframe. We did see a bit of a recovery and are currently trading at $93.29, at the time of this report.

The price cuts out of Saudi Arabia, declaring a price war, is very telling. They did not cut production as they should do as prices fall. By cutting back on prices they want to hold onto market share. The Saudis do not care about over production or the increasing supply of oil right now. They care about being relevant in the oil industry.

As we push forward into December and the holidays, the price of oil will continue to slip back below $90 and towards $85. There is some sunshine though. The American consumer has more money in their pockets now. Gasoline prices are declining which means they will have more money to spend in December. Lower oil prices, means lower gasoline prices and more money for consumers to spend in retail stores. This is a good thing for the U.S. and global economy over the next six months.