US oil prices are treading water above $60/barrel for the 1st time since 2015. A little scary for some! It poses the inevitable question whether or not we secure our fuel now, at what seems to be the high point or wait for a possible drop in the market, but risk a continued rally? Sometimes looking back at history can help make these tough decisions a little easier.
Since 2013 we have seen the price of the barrel of oil peak at $110, capsize to $26, then roll back to that $50-$60 mark. After watching this huge price fluctuation over the past decade, this is what we have learned.
Above $80 crude is too high- Cash flow is ample & investors end up flooding the market by funding way too many drilling rigs, this is corporate greed at its finest. What this ultimately does though, is send inventories through the roof, while demand stays the same; ultimately reversing the market and we see price fall.
Under $40 crude is too low- Cash flow dries up, investors start to tighten their belts and not only are there no new drilling, but the current drilling starts to shut down. Basically production comes to a screaming halt, inventories decline; while demand sees no change. That is when you start to see the price rise.
Where does the crude oil price ultimately go in both scenarios???? They seem to like to settle at that mid-range of $50-$60/barrel. This range is considered to some as the “market balance.” It is the price point where consumption = production. Inventory levels are neither too low nor too high, they are just right—kind of like baby bears porridge. And, hey, who doesn’t like a great bowl of porridge?
Since the 1st of the year- we have seen a spike in the price of crude like no other year in recent history. We went from $60ish crude on Jan 1 to almost $65/barrel in 2 weeks. That is a lot for the market to handle in such a short period of time. Most of the strength stems from some geo-political tensions , like talk of the US imposing sanctions on Iran; Venezuela’s current and almost overnight economic collapse & quite a bit of government scandal in Saudi Arabia. We are also feeling the effects of OPEC’s success in cutting production and a pretty weak dollar.
Please keep in mind, no one of these elements are long term. It already looks like the Trump Administration is backing away from throwing sanctions on Iran-at least for the 1st quarter of the year, and reports of Venezuela’s oil production resuming, indication that they may be back on their way to financial stability. OPEC will continue with their cuts through the end of the year, but demand will decrease over the next few months, therefore we should see an increase in inventories despite the cuts. And finally, as our economy strengthens so will our dollar.
So, to sum it up; I believe we will see a dip in the crude market over the next 30 days or so. This will be a great opportunity to lock in your fuel for the upcoming year; before spring demand kicks in! Please don’t misunderstand me, I am not saying we will see the levels of last year, but I think we will see slightly lower prices than those that are currently being offered.
Why won’t we get back down to 2017 levels- A few things have changed over the past 12 months …
By Kim Leisner, Energy Sales Manager