04/06/2015 01:57 pm ET Updated Jun 06, 2015

The Future of Oil

The next direction of the oil price, it is the question everyone seems to be asking right now; at least most people in the finance game, the energy game and practically anyone who owns a car. There are certainly a huge amount of predictions out there about where it is headed in the coming days, months and years; but I am pretty set in my conviction about where I believe the price to be headed. Underlying this enormous interest in the crude oil price movement, is two other arguments. The first revolves around the Peak Oil discussion, and the second revolves around the thinking that in this day and age the world should really be moving away from non-renewable energies and into more renewable sources of power, such as wind and solar. I will put this discussion of mine into three separate blog posts, in the first I will focus on the future direction of the crude oil prices, in the second I will discuss Peak Oil and in the third I will be discussing the renewable vs. non-renewable energies argument, and finish by wrapping up the three blogs. I understand that not every reader will agree with my viewpoints, but that is as it should be. I will begin by discussing each issue I have outlined above, and will finish by integrating the arguments and presenting my vision for how I see the future of global energy panning out.

In the coming few months I see that the price of a barrel of crude will move down to around the $30 USD range. Only recently the oil price tumbled 4% to below $50, driven by the nuclear deal reached with Iran. Loosely though, I think that the price will be driven mostly by technical factors, along with a widespread conviction that extraction all around the world is going through the roof. Certainly in the US, the new (ish) technological innovations in shale rock drilling, such as horizontal fracking, have enabled supply to be driven higher. The demand meanwhile has not (noticeably) abated in many places around the world. It is noticeable to point out that resource demand in China has basically already changed from infrastructure materials like iron ore, to more energy-based resources such as LNG Gas. This is very noticeable by the sudden drop-off in the iron ore price, towards $40 USD per metric tonne. This demand for energy, both foreign and domestic, will be increasing in China despite their decreasing economic growth numbers. In the near term though, I do not believe that increasing Chinese demand for raw energy materials will effect the global commodity prices of these materials. It is important to remember for market participants, that prices are often overly reactive, and will typically overshoot intrinsic price levels to both the upside and the downside.

To explain how I see the technical picture of the oil price going forward, I will refer to the Darvos Box Theory. This theory explains quite perfectly, how I see the price movement of oil. It was developed by a guy called Nicolas Darvos in the 1970s, who infamously made $2,000,000 in the space of two years from this theory. At its genesis is the idea that stocks will move within a defined technical (price) box for a period of time. Any sustained movement outside of these boxes indicates a movement to a new box; if that new box is lower that indicates a downtrend, if higher then that indicates an uptrend. At the moment the price movement of crude indicates that it is moving to the downside.

I agree with T Boone Pickens, and his view that the price of crude will move back to $100 in 2016. The reason that I agree with him is that I believe it is only a matter of time before the market wakes up to the real fundamental picture emerging with oil supply. What is really happening with oil supply at the moment is a couple of things. The first is that the US rig count is decreasing, and the second is that due to low prices now, we will eventually see supply decreased massively. In short the forces affecting the oil price are two fold; one is technical, the other is fundamental. These two forces are currently waging a war against each other. The technical and market sentiment forces are driving the price down, and in the short term I believe that they will win the battle. In the long term I think that it is clear that the price will be driven higher by the fundamental forces of the decreasing US rig count and lower worldwide oil strikes. The companies which will emerge from this battle as the victors, will the one's with the lowest break-even costs, and the most effective methods of fracking. These companies will be able to sustain production with the low oil price in the $40 USD range, while the rest will go out of business. When the price rises back to the $100 USD range, as T Boone Pickens predicts, these companies will see some big profits.

Long-term it is the old economic laws of supply and demand that will govern the crude oil price. In many ways this will also be the case with natural gas, since it is often seen as a complementary product. In the short-term though, it will be the (often) irrational forces of the market of will govern it's movement. I absolutely am convinced that right now we see ourselves as being at a critical moment in the history of non-renewable energies. This coming period will see the squeezing out of many oil companies around the world, and many of the more inefficient companies in the US. As always the advantages of diversification and technology will enable the most efficient companies to emerge on the other side.