Oil prices may hit bottom at US$40 a barrel, CNBC reports

Financial news website CNBC reported on Wednesday that technical analysts believe the plunge in oil prices will continue until prices hit bottom at around US$40 a barrel.

The price of a barrel of US crude has already breached the psychological US$50 mark, falling 10 per cent in just the last two days.

West Texas Intermediate (WTI), the US becchmark oil, closed on Tuesday at US$47.93, down from nearly US$107 in June on fears of slowing demand amid a glut in supply. The London benchmark, Brent crude, has fallen from US$115 a barrel to less than US$52 on Tuesday.

Technical analyists - who study oil's historical price charts to make buying and selling decisions - are going back 15 and even 30-plus years in order to find where oil will go next. Many are concluding US$40 is the next marker to watch, said CNBC.

"If prior trends are an indication of where this trend will take us it seems as though the market will head straight for $40, which has been a major point of support/resistance over the last 15 years and may be again in this move," Mike Harris, president of hedge fund Campbell & Co, was quoted as saying.

CNBC explained that US$40 was around where oil found a bottom in the middle of the financial crisis in 2008. Before the energy superbull market, US$40 was also a key level where oil kept topping out from 2000 to 2004, it said.

According to technical analysis theory, oil traders who successfully bought at US$40 in 2004 and 2008 will try to do so once again as it was a big winner for them at those times. The buying demand from them should come in and make US$40 a bottom as oil continues to fall.

CNBC also added that Harris may be one to listen to as his firm's bets against crude helped its Campbell Global Assets Fund post a 20 per cent gain in 2014, trouncing other hedge funds.

Apart from technical analysis, other experts believe there is another reason to conclude that oil won't hit a bottom until it reaches US$40 as well.

"Oil will go to US$40 if only because several OPEC nations have expressed a willingness to suffer oil prices at US$40," analyst Gina Sanchez of Chantico Global told CNBC. "Moreover, it could stay there for a year, because that is what the Saudi's can afford in terms of budget deficits," she added.

Sanchez said she formed this opinion after a private meeting her firm had with a senior official from OPEC member the United Arab Emirates.

CNBC cautioned though that not everyone believes the oil rout will continue for long.

It said some veteran oil traders and chart analysts it contacted or this article were buying on Monday on the belief that maximum pain had been reached and the US$50 level would hold.

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