Related Topics
Investing , Commodities
Share This Page         

Why Crude Oil Investors Should Look Beyond Supply and Demand

Impulsive herding accounts for the volatility in oil prices over the past 35 years

by Bob Stokes
Updated: November 22, 2016


[Editor's Note: The text version of the story is below.]

Oil bulls were smiling from ear to ear on Nov. 21. U.S. crude spiked upward 4%.

The reason?

This headline seems to provide the answer (CNBC, Nov. 21):

Oil prices rose on renewed optimism that OPEC was closing in on a deal to cut production.

This "cause and effect" explanation is not a surprise. Most energy market observers believe supply and demand drives oil prices.

Sounds logical.

But take a look at this headline from Feb. 16 (BBC):

Oil prices fell on Feb. 16 despite Saudi Arabia and Russia agreeing to freeze oil output at January levels if other producers follow suit.

In one case of a prospective tightened oil supply, prices jumped. In the other, oil prices fell. Likewise, when an increase in the oil supply has been in the news, prices have both risen and fallen.

The bottom line: It's a myth that supply / demand drives oil prices.

Let's take a look at supply / demand data from 1980 through 2015 via this chart and commentary from Robert Prechter's July 2016 Elliott Wave Theorist:

The chart depicts worldwide oil production (upper time axis) and consumption (lower time axis), respectively. The letters placed on these graphs indicate major turning points in the price of oil. See if you can guess which way, and how far, prices went each time by studying these graphs. I can’t do it. The list below gives you the price changes.

The Theorist goes on to say:

If supply and demand do regulate oil prices, one would think that shifts in supply and/or demand would have alerted economists to coming price changes. Did any of the 30,000 or so economists scattered over the earth use supply and demand analysis to forecast accurately the dramatic swings in oil prices over the past three decades? To my knowledge, none of them did.

Our view is that impulsive herding among speculators is what accounts for the dramatic swings in the price of oil over the past 35 years, not supply / demand.

This herding is reflected in the oil market's Elliott wave structure, and now is a crucial time to pay close attention.

Financial Forecast Service | Financial Forecast, Elliott Wave Theorist, Short Term Update

Jump on once-in-a-lifetime opportunities and avoid dangerous pitfalls that no one else sees coming

When the mainstream is calling for permanently calm markets, that's usually when a rude awakening is just around the corner. We can help you prepare for opportunities and side step risks that will surprise most investors.

Financial Forecast Service prepared its subscribers for the 2008-2009 financial crisis, the dramatic volatility in stocks in January 2016 -- and the strong rally that followed.

And we're doing it again. Subscribe now and get complete coverage for the next 3 months AND $237 worth of gifts to help you end 2017 strong and start 2018 off on the right foot.

Your Home "Investment": A New Study Might Surprise You

This Sovereign Wealth Fund "Doubles Down" on Tech -- What It Might Mean

An “Unprestigious” Preview of Debt Deflation

Your “Investing” Brain vs. Your “Shopping” Brain: Guess Which One Wins?

Using Elliott Waves: As Simple As A-B-C

Basic Tenets of the Elliott Wave Principle

FAQ: Is it possible that today's widespread computerized trading including HFT might cause the market to stray from the Wave Principle?

FAQ: Sometimes on your charts there is overlap between waves one and four within wave 5. Doesn't that break a rule?