I’ve been meaning to do a post like this for a while, so here goes. I’ve tried to make it understandable for those that don’t run in financial circles, but have an interest in trying to understand why the things around them happen. I’ll try and keep the acronyms to a minimum, and link over to explanations at wikipedia where required. As this is hopefully the first of many such articles I’ll write, some constructive feedback would be greatly appreciated.
So, my views on where the oil price has been, and will be going. Well, in the last two years crude has bottomed out at $33, only to come roaring back to the high eighties. It sat there for a while, in a tight range as it built a base at $70.
That’s called a consolidation pattern; it’s also a precursor to what I believe is coming next.
The price of crude is up $5 this week alone. A breakout above $90 would send it up on a new bullish run to $130 a barrel.
Given that Gulf of Mexico regulations, Chinese demand, and Nigerian violence are already priced in currently, here are six new reasons for why I believe oil’s going to be moving back up. These are just my thoughts, and do not constitute any sort of advise. This may, or may not, form part of my own personal investment strategies 😉
1. The fall of the Dollar
Oil is a fungible global commodity, the price of oil is the same all over the globe and it is always priced in dollars. This means that a fall in the dollar relative to other currencies would result in the oil price going up – relative to the dollar. This means that to understand the price of oil, one must keep an eye on what the US is doing, what happens with regards to the US economic has real and visible effects on the price of oil.
2. The US FED
The Wall Street Journal reports, “The Federal Reserve on Wednesday set the stage for falling yields on bonds of just about every stripe, providing fuel for a weaker dollar and higher stock and commodities prices”.
This has already affected the price of commodities such as cotton, coffee, and copper, which are all at 52-week highs. It is my belief that oil will be joining them in short order.
3. US politics – republicans take the House
This point is a little esoteric in nature, but with a bit of joined up thinking, you can see how I come to this conclusion.
The Republican party captured the U.S. House of Representatives and have made strong gains in the Senate. In the future, US policy decisions will be harder to push through following a single parties (left/right) agenda. Caused by having democrats in the White House, and republicnas in the House of Representatives. In simple terms, this will cause a similar situation to what we have in the UK, with the coalition government, its hard for Cameron to push a “Conservative agenda” with the Lib Dems sitting on his coat tails. In the US the situation is more like having the country governed, or attempting to be governed, by the Conservatives and the Labour party at the same time – make sense?
What all of this means, is that businesses can forecast costs over the next few years as the danger of new, big, costly legislation goes away. The republicans prefer a “lets get on with it” approach, much like the conservatives in the UK, and the democrats are more about “stick it to wall street and the capitalist pigs”… ok thats a really watered down way of looking at it, and isn’t completely true, but it helps draw the comparison I am trying to make.
Simply, the sentiment of the US is swinging from the idea of “sticking it to Wall Street and the capitalist pigs” back to “lets get on with it, back to work and help ourselves”. The businesses who were sitting on cash due to concerns over the costs of cap-and-trade, for instance, can now build new factories and expand.
This increase in commercial activity and development, will further increase the demand for oil.
4. OPEC Changes Forecast
A few days ago, OPEC (Organization of the Petroleum Exporting Countries) boosted its global-oil demand forecast, due to a sooner than expected economic turnaround. The cartel of oil producers upped its consumption forecast by 800,000 barrels a day for 2014, saying it was “more optimistic regarding the speed of economic recovery”.
The day after, this new bullish outlook drove up the futures price of oil. This again, an indicator of increased demand for oil.
5. Russia is very important
Most of you wouldn’t realise this, but Russia is now the world’s largest supplier of oil, yes, even ahead of Saudi Arabia. Articles out a few says ago report that Russia’s crude production rose 4% this year to a post-Soviet high of 10.26 million barrels a day. The gain was achieved with increased production from Sakhalin Island, and oil exports increased to 4.97 million barrels a day. This news has actually caused alarm rather than celebration. What happens when Russia runs out?
President Putin has stated it will take $280 billion in investment dollars to stop a 20% fall in production over the next 10 years. The country must constantly find sizable new fields to keep production growing; the old Siberian fields are declining at a rate of 5% a year.
Doubts over the security of the supply in oil, while there are more and more increasing demands for oil will further push up the price.
6. Sharp decrease in the supply of crude
The American Petroleum Institute issued a report last Tuesday that said the US crude inventory declined by 4.1 million barrels for the last week in October. That was larger than the 2 million barrel decline the market was expecting. This will cause more doubts over the supply of oil, and demonstrate an increase in demand.
So what does all this mean?
We are two to three years removed from the economic crisis. There are an increasing number of demand indicators for oil, consumption is starting to increase again. Given the stages of bear markets, we are well past the denial stage. Anger has turned to apathy. Bargaining went down with the US property foreclosure mess. Most investors are somewhere between depression about the economic downturn and acceptance of it. People with cash (which as we all know is king) are sitting on it, earning high interest (relatively speaking), and are waiting for the right opportunity to put it back to work. The $600 billion injection from the Fed will drive down these interest rates and force them to seek gains elsewhere. The new Congress will keep the US economy ticking over, and not put costly road blocks in the way of economic development. A lot of this uninvested money will go to oil.
This market is going up oil, gold (i’ve been talking up gold for a long time!), food, and emerging markets.