Oil prices have been volatile over the past year. While prices hovered close to the $100 mark last October, a number of factors conspired to drop them to the low $40s by Christmas. The direction that prices will take over the coming year, and further out, will depend on a number of factors. Whether you are bullish or bearish on the markets will depend on which of these influences you view as having the greatest impact on prices.
Anticipating a Bullish Market
The most persuasive case for a bullish market lies in the fact that production cuts by OPEC countries have occurred. They are something of a wildcard. The probability that supplies will fall in the near-term depends mainly on geopolitical realities. Venezuela’s production has been in freefall, and the relative absence of waivers, moving forward, means the sanctions against Iran are more convincing.
Over the coming years, it could make sense to be bullish about the oil markets. Oil producers worldwide have not invested enough in their projects. The two years between 2014 and 2016 saw capital spending fall by more than 40 percent. A gap in the supply of oil is likely to come up as a result.
If supplies are to match demand, the world’s oil producers would need to add about three million barrels per day to their production, roughly what drillers in North Sea produce each day. It could make sense to be bullish about oil if oil producers around the world, the U.S. included, are unable to step up production so greatly.
Anticipating a Bearish Market
A decade ago, the arrival of the recession meant that demand for oil fell worldwide by more than a million barrels per day. Growing demand from non-OECD countries could not even out the drop in demand from OECD nations.
Today, the IEA foresees growth of close to 1.5 million bpd in 2019, and OPEC partners have cut back production by 1.2 million bpd. Demand from non-OECD countries has outstripped that from OECD countries, as well. Should a recession occur now, there would not be much impact on demand. Today, the risk to oil prices comes from soaring American production. Oversupply and the resultant drop in prices are a real threat in the years to come.
A Number of Unknown, Hard-to-Predict Factors
Demand and supply for oil can be affected by a number of wildcards. It can be hard to predict the kind of impact that the following factors will have on oil prices.
- It can be hard to tell whether OPEC and its allies will continue to cut production to prop up oil prices. An OPEC meeting is planned for late in June.
- The sanction waivers granted to some countries will expire in May. It can be hard to predict whether the waivers will be renewed, even though the administration has committed to zero extensions. The U.S. aims to cut Iran’s oil exports down to zero in the far term.
- If an American trade deal with China doesn’t materialize, it could mean less trade. It would have a dampening effect on global oil prices.
- Since oil is priced in dollars, a strong dollar pushes down demand, and a weak dollar raises it. If emerging market currencies remain strong, they make American oil affordable as well.
- America is planning legislation to make oil cartels such as OPEC illegal. If such laws come into existence, oil prices may drop worldwide. American oil producers would be affected by the drop in prices.
It Isn’t Just About Supply & Demand
According to Sigma Drilling Technologies, a leading pulsation dampener manufacturer and pulsation solutions company, in an ideal world, oil prices would be determined mainly by how much supply there was, and what the markets demanded. In the real world, however, there are myriad factors that affect prices. Everything from a recession to legislation, and from trade deals to cartels, can affect the way prices behave. It’s anybody’s guess which one of these factors will exert the greatest influence on prices in the years to come.
