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Oil Volatility – Part 1

February 4, 2015

Oil demand and supply imbalance created volatility in oil price. This was mainly due to increase in supply side. When supply increases, the prices goes down. The question comes how much. The  cost for US oil producers is $40 – $45 while cost for middle east oil producers is $10 – $20. Price required for oil producers to make profit is $50 – $55.

In my opinion, before prices were driven by OPEC (middle east cartel) which now prices will be driven by US oil producers. Since there required price is higher than middle east oil producers. US oil producers does not have any cartel rather they work in and as open market concept where market decides the price.
At here implicit price required by US producers is $50 – $55.
Validation of my theory or understanding is drop in rigs started when the oil price was around $55.
In short run, the oil price will remain in the range $50-$60. If US makes cartel, the story will change again. Otherwise, with current scenario,  I see oil to stay within range. Let me put it in another way, oil entry point is $50 and exit point is $60.

The symbols where oil is the driver are SU, UWTI, LEG.TO, LRE. TO, LTS. TO and XOM

By Gulshan Malhotra

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