Oil Going Down The Drain?

With the markets in panic mode to end last week, commodities, including our beloved black crack, took a major hit as traders jumped ship. Brent crude oil dropped $5 a pop on Thursday, trading as low as $107.25 before recovering slightly.

Meanwhile, WTI crude closed last week at 87.05, down nearly $9 for the week! For the record, it’s now trading at its lowest level since February earlier this year!

Ahhh… oil… the natural resource that flows though the veins of the world economy and gets the party started! As we pointed out in the School of Pipsology, companies use oil as a source of energy to produce all the various products that everyday consumers need.

The problem is though, that the U.S. economy ain’t exactly a well-oiled machine. As it is, demand is low and nobody is buying. If everyday consumers aren’t spending, then companies must cut back on their production levels, which also hurts the demand for oil. As an old friend always used to say, it’s a vicious cycle mate!

Everyone is concerned about the state of the economy and this has prompted rumors that the Fed will pump in additional quantitative easing juice. This has spooked many investors, which helped lead to the huge drop in commodities last week.

The question now is, will investors continue dump oil or is this merely a much needed correction after the massive rally over the past year?

Let’s go back in time and see what happened the last time oil prices tore up the charts.

WTI Crude Oil Weekly Chart

Looking at the chart above, we can see that oil went on a massive tear from January 2007 to June 2008. WTI crude prices rose nearly 250% before topping out at 147.00 in early July 2008. What happened next? Well, the Great Recession hit and oil prices fell drastically before bottoming out at around $34/ barrel.

Could we see history repeat itself?

On one hand, the U.S. economy not exactly churning and burning, which could hold back demand for black crack. With fears of another recession possibly hitting the market, don’t be surprised to see oil prices to buckle under the pressure. It may not be long till we see WTI crude hit $70 a pop.

On the other hand, this isn’t 2008. Asian demand has been the major driver of oil prices, with China and India leading the way. With many Asian countries still on a roll, demand may remain strong. This could keep oil prices afloat and prevent a drastic drop similar to that of 2008.

For the meantime, the markets will most likely focus on the state of the economy and whether or not the U.S. will be kicking in more stimulus measures. In the end, it may be sentiment that becomes the deciding factor that makes or breaks oil prices!