by Bob Stokes
Updated: March 27, 2018
There's a widespread assumption that supply and demand drive oil prices. Almost all economists base their oil forecasts entirely on this premise, and so do many speculators.
If the oil industry ramps up production and increases supply, economists expect a drop in oil prices. If production decreases, or some other factors hint at supply constraints, they anticipate a rise in oil's price.
A case in point is this March 23 CNBC headline:
Trump security pick John Bolton likely to turn up heat on Iran and boost oil prices
As you may know, Bolton is considered to be "hawkish" toward Iran, so the thinking goes that a ramping up of U.S. sanctions against the nation could hamper Iranian oil production or Iran's ability to sell oil on the open market.
It may very well turn out that oil prices do move higher, but, according to our research, production is not everything.
Consider this graph and commentary from EWI founder Robert Prechter's 2017 book, The Socionomic Theory of Finance:
Supply-demand theorists glance at this graph and declare that the trend toward more U.S. oil production caused oil's price to fall. But the claim does not bear scrutiny. How does one get a 14-times rise in the price of oil out of the perfectly sideways production trend from 1998 to 2008? It seems a bit extreme. Oil prices then crashed before the volume of production emerged from its historical range, an event that doesn't fit the mechanics paradigm. Finally, it is outright impossible to account for the fact that oil prices tripled as production surged from December 2008 to May 2011 and held up for three years thereafter as production continued to expand. This history of behavior mercilessly mocks the ubiquitous assumption that changes in the supply of oil determine changes in its price. Yet no one seems to notice.
Rather than a change in supply dictating a change in price, the chart shows one thing unequivocally: that a change in price ultimately encouraged the discovery of a new source of supply. The huge, 14-times rise in the price of oil from 1998 to 2008 prompted U.S. oil producers to step up exploration, which ultimately led to new production.
So, if you're an oil trader, basing your trading decisions on the traditional supply-demand model may do great damage to your portfolio. Supply and demand factors do play a role in price formation, but they are far from being the only factors.
The trend in collective psychology of speculators, reflected by Elliott wave price patterns on oil's price chart, govern oil prices to a much higher degree.
Indeed, the fact is that the Elliott wave model helped EWI call "every major turn in crude oil since 1993." It's a verifiable claim.
Now is the time to learn more about this essential forecasting tool, so you can stay ahead of the oil market trend -- as well as those in other major financial markets.
“When an Elliott wave is complete, it brings striking clarity to the market’s…likely future direction. Such junctures offer complete independence from the herd, and those times tend to be highly rewarding.”
- Robert Prechter, The Socionomic Theory of Finance (2017)
Imagine knowing the market's "likely future direction" – before the news; without any news. What an invaluable insight, with the right risk management!
In our almost 40 years in the business, we are yet to see a forecasting method that surpasses the usefulness of the Elliott wave model.
Try it for yourself, risk-free for 30 days – and see if you agree. Here’s how:
Reset Your Thinking By Understanding True Market Dynamics
You start by receiving a copy of Robert Prechter's new book, The Socionomic Theory of Finance. Thirteen years in the making, STF exposes layers of flawed assumptions and offers you a new approach. The book is jaw-dropping and, at times, an uncomfortable read. STF uses history to painstakingly challenge beliefs. It shows what actually happens in the markets. It does so fearlessly, taking on even the most sacred of assumptions. The book is acclaimed by academics, practitioners and investors alike as a landmark paradigm-setter. It comes in print and online editions and sells for $99. We include it free with your Financial Forecast Service bundle.
Your next step is to be sure to stay alert, on the lookout for danger and opportunity. The Financial Forecast Service equips you to do this.
Your Financial Forecast Service guides -- three of the best-known market analysts in the world:
As featured in:
Get The Socionomic Theory of Finance FREE with your subscription to the Financial Forecast Service.
Get the digital version of this ground-breaking book FREE
with 45 days of our flagship Financial Forecast Service.