The apprehension that American sanctions will turn off the spigot from Iran has had a number of predictable effects on prices. Driven by fear of shortages, energy-hungry nations across the world have tried to ensure that their oil imports will not be affected. The fear has made it possible for oil-producing nations to jack up prices. Brent Crude, the international benchmark, has risen 19% in the two months since August, and is at over $85 a barrel in the first week of October. WTI futures have risen an unbelievable 50% to about $75 a barrel.
A Flashback to 2008
The summer of 2018 came with some of the strongest consumer demand ever seen for oil. Nevertheless, it wasn’t anywhere near strong enough to drive oil prices this high. It wasn’t demand that was responsible. If the inflation was the result of strong fundamentals, these prices would be sustainable. Since it is disruption caused by sanctions and shortages that is behind the price expansion, however, the current situation demonstrates signs of a bubble, not unlike the one that shook world markets in 2008, when prices went from $75 a barrel to $150 a barrel, and then back down, all in the space of 12 months.
While prices may not go any lower than where they are right now, they are likely over the next few months to rise to very high levels. Many analysts believe that $100 a barrel for the next few months is likely. The fact that global buffers have fallen to the lowest levels ever seen means countries around the world no longer have the ability to absorb shock from such fluctuations. Oil prices, therefore, are likely to stay high for a while.
The Imbalance Between the Long & Short Positions
Financial traders tend to favor different styles when it comes to hedging their bets. Some take the long position – they buy now, and hope that prices will rise to earn them a profit. A short-position trader, on the other hand, believes that the market is overvalued and will fall. For this reason, he borrows holdings now – commodities, shares or other assets — in order to sell them. He believes that prices are as high as they will go, and hopes to buy it all back later when prices have dropped, and return the holdings borrowed.
Long-position traders now have placed their bets on more than one billion barrels of oil, meaning that they believe that prices will rise quickly. Short-position holders, on the other hand, have become vanishingly rare. This is an unusual situation, one in which almost no one believes that prices will fall in the foreseeable future.
Making Hay While the Sun Shines
According to Sigma Drilling Technologies, manufacturer of pulsation control equipment, suction stabilizer devices and other critical equipment that oil drillers use to boost efficiency, the bullish market will probably not last more than six months. It’s as long as it is likely for spare oil production capacity to begin to yield. Other than Iran, and perhaps Venezuela, there is no great disturbance or disruption looming on the horizon. The oil industry will learn to work around these problems. Until then, prices will head north.
For drillers in America and around the world, keeping rigs in top shape has rarely been as important as it is now. With a very active bubble taking shape, there isn’t much room for error. Rigs have to be in great working shape, with as little downtime as possible. Over the next few months, drilling for oil is likely to be a highly profitable activity.
Learn More About Sigma’s Solutions
To request a free product demonstration by Sigma Drilling Technologies, call (281) 656-9298 or fill out our contact form today.
