Oil’s Fall Won’t Last Much Longer

Sunday, 24 Jun 2012 02:46 PM

By Sean Hyman

Right now, the price of oil has dipped into the high $70s and Brent crude just dipped below $90 per barrel. But don’t get used to that. It won’t last much longer. Why?

There are a few reasons, actually. One of the main ones is that Saudi Arabia has a breakeven point on oil at $78.30 a barrel. This is how much they need to make per barrel in order to meet their budgets.

The Gulf Cooperation Council (GCC) needs an average of $79.80 per barrel to meet their budgets on average. The GCC comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE).

So as I’m writing this, WTIC oil is trading in the $78 area and Brent crude in the $89 area. Sure it could fall a bit further and for a bit longer, no doubt.

But I honestly don’t believe that the GCC members are going to shoot themselves in the foot and not fulfill their budgets and cause an uproar among their people when they can collectively pull back on how many barrels of oil they put out per day and get that average back up.

The GCC budgets are based off of the Brent crude price. So we’re only talking another $10-$12 per barrel off of the Brent crude price before they are off track to meet their budgets.

In the past, if that’s happened it’s only happened for 1-3 months and then things were back on track. I believe that will be the case this time with so many Middle Eastern dictators unseated over the last couple of years.

The next reason why I believe that oil won’t remain low for too much long is because, while there are fears that the economy is slowing down, it doesn’t show up in the GDP data yet.

Three quarters ago, GDP was at 1.5 percent. The next quarter after that was 1.6 percent. The most recent GDP reading was 2 percent. While that’s not stellar growth, it’s certainly not a slowdown, either.

So until that picture starts to change, I’m not so much worried about a slowdown.

The next fear out there is that China is slowing down. No doubt, they are. That’s correct. Their GDP right now is at 8.1 percent. But here’s what I’m looking at.

In the global credit crunch, China’s GDP only fell to 6.2 percent and then almost immediately rebounded. And it went from just over 6 percent to almost 12 percent in four quarters.

The last time their GDP got anywhere near that low was in 2002 and in just over a year, China’s GDP was back up over 10 percent.

So Chinese slowdowns are typically short-lived and they bounce back fairly quickly…quicker than most countries. Therefore, I don’t believe the slowdown in China has much further to go, and when it bounces back, it’s going to lead oil higher quite quickly.

I believe we’re in the latter innings of this recent round of global sluggishness. I believe now that oil is in the $70s on WTI crude that it’s got more upside potential long-term than it has downside.

It could fall further near-term, but I’d be a buyer on dips as long as you have at least a 2-year time horizon.

For my Ultimate Wealth Report subscribers, we’re playing oil through one of the world’s biggest oil companies that trades under its book value, has tons of cash on its books and earns a respectable dividend.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.