The Real Direction of Oil Prices

After following Oil news for basically one year, I have found that the answer for the direction of the price of crude oil is actually pretty simple.

First, let’s recap on why crude oil is so cheap:

Main Reasons:

  1. Oversupply: Which is true, as of today: US crude inventory is at: 455.4 million barrels, the highest it has been in over 80 years. (according to EIA)
  2. The US economy is doing better than the rest of the world, so the currency value is higher. Europe just got out of Greek Crisis, Russia still semi-Recession from loss of funding due to oil taxes, China productivity + demand went down, while the rest of the world was never really that good to begin with, lol. Since the US dollar is so high in value, the commodities such as crude oil, gold, etc. are worth less.
  3. OPEC will not be the swing producer for the first time in over 50 years, so they will just let the markets determine the prices. This might be good/bad, this I’m not really sure.
  4. US Federal Reserve says they will raise rates = higher value for dollar = lower value for commodities = lower value for crude.
  5. Iran sanctions lifted, so possible oversupply of more oil, but undetermined for now.

So what is the direction of oil:

Most likely, oil/gas price might have one last rise or surge before the end of fall, and then it will freefall to around ~$30/bbl. Any more, and it will probably make almost all of US + Canada oil extraction unprofitable. For the next year, it will probably be steady at $30-$40 until april/may and it will rise during the summer. Maybe peak around ~$60/bbl and then drop to ~$30/bbl in winter. This process will probably happen a couple of years, before the supply levels off with demand and price returns to the steady $60-$80/bbl.

My two cents: World Oil demand is expected to grow to about 98 million BBL/D. Everyone is saying that crude oil is somehow in so much oversupply, 80 year high, but one has to think about this. Yes, 80 years ago, US mainly supplied the entire world’s oil. However, cars were just coming out, China + India were not really independent, lots of emerging markets never existed, etc. Therefore, Demand 80 years ago was much lower. I think the markets are overreacting from the crude oil crash.

Anyways hope this insight helped, just a student here, so it might be right or might be wrong. Who knows, right?

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