News

hot topic

Oil Bottoms Out Again

Money and barrels of oil in water.

Is oil finally headed for some long awaited stability?

Oil has been dominating headlines for quite some time now. Prices had reached record lows amongst political and economic unrest. It appears though, that there might finally be some long overdue recovery, partially due to global actions. Oil is an asset that is largely influenced by outside geopolitical sources. As the oil crisis showed no end in sight, OPEC's action to try and reach a production freeze seems to have been met with more acceptance than previous suggestions, though we must still wait and see what comes out of their April 17th meeting, especially considering the suspected absence of Iran and Libya. Developments in Russia have also certainly contributed, as favor for the country and their currency rose dramatically after public support for their exit from Syria. Oil, being Russia's largest industry along with gas, has certainly reaped the benefits of the positive political moves.

Understanding Oil

The crude oil industry is built of several brands such as Brent Light Crude Oil and Bonny Light. In addition, there are several types of oil such as light, heavy, sweet and sour. One barrel of crude oil is the equivalent of 42 U.S. gallons. After the barrel of oil is refined, it yields approximately 20 gallons of motor gasoline and seven gallons of diesel. Lighter, sweeter crude is in more demand globally, but is becoming increasingly difficult to access.

In 2004, annual worldwide oil consumption was 30 billion barrels. This would not have been controversial, except that new discoveries during that time led to a fall to eight billion barrels. By 2005, worldwide demand for oil had reached 31 billion barrels, leaving worldwide emergency stockpiles nearly depleted for 37 days. While Saudi Arabia, Russia, and the U.S. are the top oil producing countries in the world, they have more difficulty meeting demands. Currently, 62% of the world's accessible oil can be found in the Middle East, centered on five countries: Saudi Arabia, United Arab Emirates, Qatar, Iraq and Kuwait.

Crude oil futures are traded in the following exchanges: Futures contracts for crude oil are traded at the New York Mercantile Exchange (NYMEX), Intercontinental Exchange (ICE), Dubai Mercantile Exchange (DME), Multi Commodity Exchange (MCX), India's National Commodity and Derivatives Exchange (NCDEX) and the Tokyo Commodity Exchange (TOCOM). The oil future ticker is @CL.

OPEC is considering switching crude oil from a U.S. dollar quotation system to either the euro or to a basket of multiple currencies.

 

 

 

 

Drivers

  • For the past 50 years, the price of crude oil has been denominated in U.S. dollars. With the fluctuation in the value of the U.S. dollar and the prominence that newer currencies such as the euro are gaining, OPEC is considering switching crude oil from a U.S. dollar quotation system to either the euro or to a basket of multiple currencies. This could have an adverse effect on oil prices in the short run. 

  • Alternative methods of oil development are gaining prominence. Oil shale and tar sands are becoming viable oil producing sources. As the price of technology begins to decrease, these sources become more accessible to refiners. Methods for turning methane and coal into oil substitutes, first discovered in the 1930s and during WWII, are being explored again. All of these alternatives have the opportunity to upset crude oil prices.

  • Global warming is considered an unintended consequence of using petroleum-based products. This has led to an aggressive move to develop green energy sources such as electric cars, fuel cells, ethanol, liquid natural gas and others, in the hope that they can potentially reduce the world's reliance on crude oil. As these technologies become more common in the marketplace, they have the ability to displace crude oil.

  • Geopolitical Conditions - geopolitical conditions have a significant influence on oil prices. In general, wars increase the demand for oil and the uncertainty in the markets. As a result, oil prices increase.

Implication

  • Inflation – calculating the consumer price index is based largely on oil prices. Therefore, one of the possible reasons for a lower inflation figure might arise from low oil prices. In the last year due to the sharp fall in oil prices, there was an adverse effect in inflation in the short run. This led to changes in the monetary policy of central banks.  

  • Correlation with stock indices – in the last year a positive correlation was measured between oil and the stock markets.

  • Russia and Canada are countries whose production is heavily dependent on oil sentiment. The depreciation of oil prices in the last 18 months has led to currency depreciation in these countries.

Chart

Currently the oil is traded at 40$ for a barrel. This price is close to a significant resistance level which has played a major role in the past.

Oil is certainly worth keeping an eye out for. If oil does manage to stabilize, it automatically means there are plenty of things going on in the market and in politics that we should turn our gaze to and perhaps even take advantage of.

OPEC is considering switching crude oil from a U.S. dollar quotation system to either the euro or to a basket of multiple currencies.

Trade now