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Thursday, 18 October 19:45 (GMT -05:00)



Stock and commodities markets

Three Big Questions Related to Oil Prices


Oil prices has been continuously moving up and down over the last few decades, and this is something that keeps worrying millions of traders of investors all over the world. The most difficult thing is to figure out why exactly crude oil prices reach a certain level at any given point, especially these days. 

 
At this point, many observers watching oil prices may have a hard time explaining why oil prices have been behaving this way. In the meantime, NordFX experts report that Brent oil has been trading around 69 dollars per barrel. Even though the price dropped from $70/b, it is still considered to be fairly high. A week before, the price moved down to 67 dollars per barrel but then rose back to 69 dollars per barrel and higher. So, the long-term trend still seems to be bullish.
 
In March 2014, Brent oil prices used to be measured in triple digits. Back then, Chevron CEO said that because of the deficit of cheap oil, 100 dollars per barrel had turned into 20 dollars per barrel. 2 years later, the prices dropped down to 28 dollars per barrel.
 
It is interesting to note that the oversupply that pushed oil prices to record lows was actually caused by the OPEC's production hikes since the cartel was trying to increase their market share. Today, the prices are testing 70 dollars per barrel while international experts are desperately trying to explain why this is happening. By the way, the opinions that those experts express often contradict each other.
 
The current market situation raises 3 interesting questions:
Why did oil prices gain over 1005 in 2 years despite all the bearish forecasts? The thing is, the market crash that was seen more than 2 years ago was caused partially by weak demand (the Chinese economic slowdown started back then) and partially by excessive supply. Back then no one would have thought that the OPEC would cut their oil production. The Saudis (the world's biggest oil producers) could easily have refused to participate in the OPEC+ deal. The excessive demand could have slowed down the U.S. shale oil production and undermined Iran's oil industry. In reality, the demand for crude oil did recover as China had managed to revive the national economy. Commodity prices started recovering.
 
Over the next few months, more signs of global economic recovery started to emerge. At the same time, despite expectations, the OPEC did manage to cap their oil production and therefore reduce the oil supply and push oil prices higher.
 
So, how surprising does the recent oil rally look? More often than not, oil rallies are explained by some tensions in the Middle East. Morgan Stanley experts assume that the market has been worried even though the oil shipments may well have remained intact. 
 
When the prices went up drastically, American shale oil companies started increasing the amount of their active oil rigs. However, this holds true for big companies while smaller ones have been cautious since when you start drilling, it may take you several months to start shipping the oil.
 
Why do international markets think that the recent oil rally is a positive thing? Financial markets have been showing no signs of worry because of the oil rally. The stock market has been going up confidently, which is something that surprises many observers. Since the 1970s, international markets have seen another oil rally as a sign of an economic disaster. Over time, the world's leading economies started paying less attention to the oil market. 
 
In 2005, the American demand for crude oil reached its highest level. In their turn, oil exporters
Started more dependent on high oil prices to finance their huge budgets and pay for increasing imports. To cover their imports, most Middle-Eastern exporters need at least 40 dollars per barrel. Apparently, the higher the oil prices, the more money those exporters actually make. Higher oil prices are good news for shale oil investors as well since such prices make those shale oil investments more promising. At the same time, some experts believe that higher oil prices are the sign of a healthy Chinese economy, which is the biggest oil importer in the world.
 
Where will the prices stabilize? While looking at the price charts, experts are trying to figure out where those prices will eventually stabilize in the near future. Some of them are afraid of another oil market crash. If the OPEC doesn't back on the deal and start increasing their production rapidly, we are unlikely to see oil prices drop in the near future.
 

 

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