Can Those Who Bought Oil Last Month Double Their Money Soon?Author: Kathryn Gaw
For the first time in six months, oil prices are close to hitting $50 a barrel. While this is still far short of the record-breaking prices of 2008 (when oil was trading for more than $103 per barrel), it is a vast improvement on the barrel-scraping prices of January 2016, when oil hovered around the $26 mark.
The price crisis was largely caused by a global surplus of oil, and the rise of shale gas and liquidized natural gas (LNG) stores in major economies such as the US, Russia and China. However, earlier this month one million barrels of oil was lost in the Fort McMurray fires in Canada, while further 800,000 barrels have been destroyed in a matter of weeks as a result of terrorist attacks in Nigeria, Africa’s biggest oil exporter. These losses have balanced out the surplus, meaning that oil is a hot commodity once again.
Furthermore, the market is finally starting to even out after a flurry of buying activity in January and February, as hedge funds and futures traders fought to shore up stock while the prices were low. This means that the current oil market is as stable as it has been in months, with limited volatility due to market movements.
Even Goldman Sachs has started to take a bullish position on oil. Earlier this year, the investment bank claimed that oil prices would fall once more to around $20 a barrel, but now analysts are predicting that prices will stay at $50 for the rest of the year.
But can oil prices rise much higher?
While most forecasts see oil prices staying between $40 and $50 for the next three years, some analysts are confidently predicting a big spike as early as 2017. But as the past six months have shown us, oil prices can be hugely affected by the sorts of events and market movements that nobody can predict.
Anyone who bought up oil stock earlier this year has already made enormous gains in a very short period of time. This may spark a selling frenzy, which could result in a short-term drop in oil prices. Or it may encourage formerly bearish investors (such as Goldman Sachs) to raise their exposure to oil once more, pushing prices further up.
Conversely, the ongoing threat of natural disasters and terrorist attacks could lead to a global oil shortage overnight, causing oil prices to soar. As with any commodity, it all comes down to market speculation. But there are a few things that we know to be true:
1. Disruption in the supply chain is likely to continue throughout the year ahead.
Militants have threatened to keep on targeting oil sites in the Niger Delta, while Venezuela – another Opec member – has recently announced a 60-day State of Emergency. Alberta, Canada is facing insolvency in the wake of the Fort McMurray wildfires, a decision which would have a knock-on effect on its ability to maintain oil production.
Ongoing disruption will result in market volatility and global shortages of oil, which would push barrel prices up significantly.
2. Big suppliers are reducing their exports
Over the past year, the US has gradually reduced its daily output by more than half a million barrels, as shale oil supplies dwindle and LNG takes off. China has also seen a reduction in its exports, and analysts predict that the country’s output will drop by at least 3 per cent overall in 2016.
3. Reduced exports equal higher oil prices.
Saudi Arabia may raise its production goals. Saudi’s veteran oil minister Ali bin Ibrahim Al-Naimi recently stepped down, and rumors are now circulating that Deputy Crown Prince Mohammed bin Salman is planning to shake up the Kingdom’s oil industry.
Last year, Saudi increased its oil output to a record 10.6m barrels per day by the middle of 2015, and it has the capacity to raise it even further. With global shortages on the horizon, this would be a great time to raise production.
And of course, the more oil there is, the cheaper it’s going to be.
4. Trader’s gonna trade
So far this year, hedge fund managers have bought near-record shares in crude oil, using sophisticated techniques such as net longs to Maximilian their gains when the prices rose again. If oil prices do fall back to again, they are unlikely to stay low for long before the money managers push market demand up.
This suggests that prices won’t dip too low in the near future.
No one can predict the future of oil prices, but it certainly pays to keep an eye on the market and current events in Opec countries.
However, oil prices will always come down to the basic economic principle of supply and demand. The demand is certainly out there, it’s just a matter of safeguarding the supply channels and minimizing volatility.