Forex Trading Library

What is Happening with Oil?

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Crude prices have been on something of a roller coaster over the last month and a half or so. While analysts point to individual news items around each price move, getting a handle on the general trend is a lot more complicated.

The situation of oil is representative – or arguably caused by – general uncertainty in the markets. A large number of traders are expecting some kind of recession in the near future, which would cause major swings in asset prices across the board. But the timing is open for a wide range of debate. Debate that could get more intense through the second quarter of the year, and exacerbate the volatility in the markets including oil.

Cuts haven’t worked

The latest radical swings involve both geopolitics and the economy, and likely so will the events in the lead up to the June OPEC meeting. Today, the oil cartel will issue its monthly report, which could give some short-term fluctuations in the market. But most eyes are on the June meeting, which is expected to be in person in Vienna. An in-person meeting is generally seen as intending to provide a new direction, as opposed to virtual meetings which typically roll over existing agreements.

In late March, OPEC+ members voluntarily cut back production, driving the price of oil higher. But the price gain was entirely erased in the following weeks as poor data came out from China. Last week, crude prices bottomed out on a two-year low before stating a dramatic recovery, but remaining below the level at which OPEC+ announced cuts. The assumption is that the cartel could constrain production even more to get prices back up.

How much oil do you need?

Price fluctuations have been driven by doubts over short-term demand, which contrasts with what are expected to be long-term supply issues. This provides reason for more dramatic price swings as investors try to price short-term risks against long-term rewards.

With the global economy expected to slump in the latter half of the year, if not fall into outright recession, short-term supply is expected to exceed demand. But, beyond that time frame, a lack of investment in oil production is expected to generate a natural decline in production even as demand picks up in a potential post-recession recovery.

Hitting the peak

With the shift towards green energy, there are doubts on the long-term viability of investments in the petroleum sector. ESG pressures have reduced available funds for new exploration and production, leading to several oil majors to simply exploit what they have and pass on gains to consumers. While this helps boost the short-term stock price in these companies with high dividends and buybacks, it means there will be less new production of oil coming on line to replace production running down.

Therefore, oil prices are expected to be higher in the future, which means long-term investors are keen to “buy the bottom”. On the other hand, oil prices are expected to bottom at some point, leading short-sellers to try to drive the price down. Until the economic situation becomes a little more certain, crude prices are set to be extra volatile in the coming months.

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