Stock exchange news. It is difficult to predict the cost of oil because there are much more unknown economic and political variables in the formula of oil price than the known ones. Yet, by defining the value of each factor, one can get to the heart of the matter. So, what will be the oil price worldwide? Will it continue its further growth or will there be a striking fall?
Why can oil get cheaper?
Experts of Forex Academy and Masterforex-V Futures Trade and Stock Exchange admit that during the recent years the market of oil futures, where the price is formed, has become not a commodities market, but a market of expectations, a part of financial market. Supply and demand are not the only factors that determine volatility fluctuations. Moreover, they do not influence this market so much as free capital, which seeks for gaining opportunities:
• inertia gets weaker. Any economy that requires support foresees large infusion into futures markets, forcing oil prices to grow by this. Confidence about stable demand for oil currently remains inertial, whereas earlier there used to be more serious grounds, such as growth of Chinese economy;
• demand. OPEC and IEA predict the decline of oil demand in 2011 and 2012 due to economic recession, Chinese included. However, in addition to reliable American bonds, investors support taking some risk. As a result, oil market is currently overheated;
• growth of the countries’ self-reliance. Arabic revolutions and Fukushima matter show that the days of effective oil business are numbered, and the world does not want to be influenced by events in other countries. The USA demonstrates this intention very well. Thus, the spread between WTI and Brent has gained major importance; oil is purchased abroad less, whereas, due to the quality of imported oil, more strategic stocks are being created rather than using oil for current needs;
• USA. Surplus oil in WTI and the USA has led to the desire to construct a pipeline to the coast, where major oil refineries are situated. This will enable tankers to be delivered to Europe, and if this target is reached, the pressure on the oil price of Brent brand will increase;
• reorientation of world economy. The next reason of oil price fall is the fact that, in addition to counting on energy self-reliance, Europe and the USA focus on alternative sources of energy. Thus, Europe counts on renewable energy, the USA – on its own coal and gas schists, and China also relies its own coal. The world is also striving for independence from motor fuel, having switched to electromobiles. Large automobile corporations are getting ready to this. However, this will not happen at once, but gradually during 15-20 years;
• recession risks. The situation in Libya, where rebels are trying to regain the capital of the state – Tripoli, is currently having much less influence on oil prices than the possible second wave of crisis. The fears of the world economic growth becoming slower pushes the oil price down most of all. This is why negative political news and statistical factors are so strongly felt by the market.
Can oil gain in price?
World economic recovery is happening at a slow pace, and nobody has yet succeeded in regaining its pre-crisis level. However, this year oil prices as well as profit from its recovery are expected to be higher than in 2008.
All this is happening because there is no cheap oil anywhere. Although the consumption level of the countries with advanced economy is lower than the pre-crisis level, increased demand from developing counties has compensated it over and above, pushing oil price up by this.
According to the experts of , the main factors that help to keep the oil price at a high level include the following:
•selling price influences recovery. Let us imagine a situation when somebody starts selling oil at a low price, for example, at $30 per barrel – everybody will want to buy such oil, and nobody will recover it, as the production cost at the majority of deposits amounts to about $60 per barrel. Thus, oil price has drastically fallen in autumn 2008, and, as a result of this, world oil recovery has decreased twice. Consequently, the lower oil price is, the lower its recovery gets. Decreased recovery in its turn shortens supply, which leads to shortage of stocks in reserve storages – cheap oil runs out, and the price rises, stimulating the growth of world recovery. The higher the price gets, the more willing investors are to invest their means into its recovery, for it is a profitable business;
• world oil stocks. The developed reserves can provide the world, according to different estimations, for 30-40 years. But is all this oil cheap? On the contrary – light (and cheap to recover) oil is running out, which means that heavy oil will also have to be recovered soon. It can lie on the planet in various geographic conditions, at various depths, which requires marginal values for investments. Only high oil price at the world market is able to encourage drilling a hole at a maximum depth, in extremely tough weather, geographic, and geologic conditions. Therefore, the price will inevitably rise in order to provide the opportunity to recover all existing oil – from the entrails of the Earth that are most difficult to reach;
• market dependence on supplying countries. The majority of Arabic countries with large oil reserves are financed only by oil export. If to divide the sum of state expenditures of such country into the number of exported oil barrels, it will make up to the minimal oil price that will satisfy this state. In the majority of cases it is $80, whereas for some it is more than $100.
Consequently, oil price depends not on the current level of supply/demand, but on the desire of monopolistic countries that supply oil as well as from energy companies, which will not drill holes at the price that is not favourable for them.
Current speculative fluctuations by $2-3 up or down totally depend on the spirits of trading participants. From economic point of view, this is not of great significance. Significant change of price can be caused by budget deficit of export-dependent country in case of lowering oil price, or it can lead to reorientation of oil consumers to other kinds of resources in case of price rise. The latter will certainly not be for the good of oil prices and will sooner or later make oil leave the world market of energy resources, but this will not happen soon.
Taking into consideration the abovementioned, the likelihood of oil price fall remains rather high is oil will not be supported by steady increase of demand and investment of capital, which is marked for gold and treasury obligations. The factors that encourage growth and stabilization have run out, that is why already this year a fall of price to $80 per barrel is possible.
Possible infusions of liquidity, which according to the head of FRS Ben Bernanke still can happen, can save the prices from falling for some time. Therefore, it is not clear whether the price will rapidly fall or move down slowly. A more exact response to the question can be received on September 21-22 after a special meeting of FRS.
Having formed bullish FRS of Н4/Н8 levels, the price of oil future has come close to MF sloping channel, which supports all bear trends, as said by the experts of Masterforex-V Department of In-Depth Trade System Study. They also admit that one more very significant level of resistance in the range of 90.35/91.20, which awaits the future price before MF sloping channel. If MF pivot and MF sloping channel, which protect this bullish trend, are broken, bear trend will continue by a strong wave с (С) of Daily/Weekly level.
The Editorial Board of “Market Leader” magazine, jointly with experts of Forex Academy and Masterforex-V Stock Exchange Trade, holds a questionnaire in the traders’ forum: in your opinion, will oil get cheaper?
• no, in the first place the USA is not interested in this;
• yes, oil prices have reached their peak.
