Being an energy investor and playing the markets has been a real rollercoaster ride in recent times with a rise and fall in oil prices to keep you on your toes and offering plenty of opportunities to profit if you got your timing right.
The question for investors right now is where is the oil industry heading in the future and how can you profit from the rebound that is expected to come?
Here is a look at how to interpret the market data and understand underlying factors contributing to the volatility, why OPEC’s actions matter, plus an insight into why pessimism seems the order of the day for oil prices in the near future.
Making sense of it all
There are downturns in certain industries and there is the sort of deep downturn that the oil industry has had to endure over the last couple of years.
On reflection, you might not think that this period would have been a good time to invest in oil wells or chase oil prices higher, but things can often change in a heartbeat and if history is going to repeat itself yet again in this industry, a recovery is around the corner, if not a boom.
What OPEC decide to do to protect its member’s interests and stimulate growth as well as protecting market share, is always an important consideration, as their policies and pricing decisions can often set the tone.
OPEC did agree to cut oil production back in 2016, and despite some dissenting voices, no one has broken rank and the agreement seems to be holding. The merits of this policy appeared to be bearing fruit as prices managed to strengthen after that decision was implemented but as U.S inventories have been building steadily thanks to the shale boom, the prospect of stronger oil prices has faded lately.
Don’t hold your breath
Any investor or oil company executive for that matter, who is waiting for a return to the halcyon days of $100 per barrel, might be in for a very long wait, and some analysts even speculate whether they will actually return to the sort of levels seen prior to the collapse towards the end of 2014.
Oil prices were on the floor at one point and the price per barrel dipped to below $30 before picking up the pace and managing to climb all the way up to $50 by the end of 2016. Not exactly the heady heights of yesteryear for sure, but it did provide a hint of promise that prices would continue to climb from that point.
Predictions of $60 per barrel have started to look wildly optimistic in light of further recent price dips, so where is it heading next?
Rollercoaster ride continues
You can find a diverse range of oil market analysts who are predicting that oil prices could hit $70 by the end of 2017 and others who are far more pessimistic and think that $40 per barrel is nearer the number we could be looking at.
That is a wild swing between the two positions and both views can’t be right, so you will have to try and decipher and interpret market conditions in order to see which opinion you agree with.
The truth is probably somewhere in the middle of the two estimates, but one thing is for sure, the roller coaster ride is likely to continue and there are going to be some wild swings in prices to negotiate or profit from if you get your timing right.
For example, some investors are watching events in Venezuela with interest, as political and economic turmoil will have an impact on markets as it is a major oil producing country.
You also have to consider the impact of oversupply as a result of the U.S shale boom, and once again, what action OPEC takes will make a difference. Its members are responsible for about 40% of global oil supplies so this is a group whose force can be felt when they want it to be.
Finding the price floor
If you are riding the waves of the oil price, a key piece of data you need to know is where the price floor is likely to be. If OPEC fails to extend their existing output cuts that could turn out to be below $40 per barrel.
OPEC announced six months of production cuts that took effect from January 2017 and that initially managed to set a floor for prices. However, the combination of increasing shale oil production and record-setting inventory levels are putting downward pressure on prices.
If OPEC doesn’t extend the current production cut deal there would appear to be every chance that markets would interpret that end to cuts as a negative factor and we could find a new lower level for prices that is below $40 per barrel.
Thomas Kent, a long-time finance and investing enthusiast, likes to help others by writing about his know-how and experiences. You can find many of his articles on personal finance and stock market websites.