What Is Going on With the Oil Price?

What happened to oil?

From 2010 to mid-2014, the price of crude oil traded within a tight band. For most of that time, the price traded at US$90 per barrel or above, at times almost piercing $110.

However, from mid-2014, the price went off a cliff. Come the start of 2016, the oil price was trading below $30 a barrel — losing two-thirds of its value in a little over 18 months.

With a glut of oil hitting the market from both conventional means and the shale oil boom in the US, there simply wasn’t enough room to store it. Reports at the time told of ships filled to the gills with oil, waiting for a place to offload it.

What has happened since then?

From the start of 2016, the oil price has continued to grind higher. Not with any great burst, mind you. It wasn’t until the latter part of 2017 that prices stabilised above $50 — generally viewed as the average breakeven level in the industry.

This year, the oil price has continued its surge, recently hitting around US$74 a barrel. Saudi Arabia, OPEC and other large producers including Russia, have cut production in a bid to support the oil price.

Add in the US sanctions on Iran — another major oil producer — and excess supply finally looks to be coming out of the market.

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What will happen next?

Helping drive up the price this year has been a swathe of hedge funds. They have all jumped on board as the oil price rallied.

However, it has become a crowded trade. Any correction in the oil price could see a swag of hedge funds selling to lock in profits.

And that is what we saw this week as oil had its biggest price drop in more than two years. Although global stockpiles are shrinking, news that Libya is re-opening four of its export oil terminals was enough to frighten speculators out of the market.

Add in a potential softening from the US towards Iran — as higher oil prices increase political pressure on the President back home — and the oil market (and prices) might once again tilt back towards a more even balance.

Matt Hibbard,
For Money Morning

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Money Morning Australia