Why Oil Prices Will Go Up Soon & What Can Sink It Further?

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If someone asks me this question and I am short of time, I will reply him/her as “why not?”. The “black gold” or crude prices are at a low and bears are on their job. Markets are driven by two emotions namely fear and greed. When things are positive the markets behave in a too greedy manner and when it is negative fear grips from all angles.

When we talk of oil prices now, Mr. Fear is seen on the drivers seat. Check any news portal, we will find all the bad news about oil. The scenario is made so negative as if crude is not at all a utility commodity. With crude prices oscillating between $40 and $50 for quite some time, we have seen reports claiming that the prices will further slip to $20 (e.g. How Low Can Oil Go? Goldman Says $20 a Barrel) !  To me, this is not just a shocker but is an epic case of the panic news we see in bad times.

We saw similar frenzy a few years back (though in opposite direction) when financial/investment biggies claimed that the oil prices will skyrocket to $200 a barrel. Such analysis popped in when the prices of oil, where triple digit numbers were considered too high, made a century and playing not out. In 2008, someone predicted this- An Oracle of Oil Predicts $200-a-Barrel Crude.

We are now in the range of $40-50 for quite sometime and this can be a consolidation phase.  This means that once this range is breached, the prices will decide the direction. Although, there can be further downside for a while, it is very unlikely that the prices will be on a forever falling mode as some analysts predict. In between the pessimistic noises all around, we can hear some sound which are more robust and futuristic in nature. These sounds are more confident that the prices are poised to go up eventually.

The biggest reason for the crude price to hit the rock bottom is that Saudi Arabia, the world’s largest oil exporter, is pumping enough oil to meet customer demands. This is done to counter the shale gas threat from US. Saudi Arabia is sticking to its policy of not cutting the production to maintain its market share. Recently, the country has taken a decision to sell debt ($100 billion now which can be increased to half of its GDP eventually!) in the form of local and international bonds to back its decision about the market share.

But there are some development:-

  • OPEC countries like Venezuela, Ecuador, and Algeria too want the prices to go up- at least over $70 to be profitable. As per OPEC charter all members should be protected.
  • Algeria’s former energy minister, Nordine Ait-Laoussine, said that the time has come to consider suspending Opec membership.
  • Saudi would not like a dismantled OPEC.
  • The kingdom’s plan to increase debt levels as high as 50 percent of GDP within five years.
  • Although the supply of oil is there, the demand is also increasing in a robust manner.
  • Competitors of Saudi are in a worse financial shape than the kingdom so and kind of compromise should come from the other end.
  • Already half a trillion dollar is already gone in the air in this “oil war” and if prices do not go up another half a trillion dollar will be gone in a year.

Connecting the dots above, there seems to be no reason that the price will go down. Rather the price should be going all up.

The only thing that can further sink the oil price now is the influence of Iran in Europe, which has overtaken Saudi Arabia as the 2nd largest seller. Iran also aims regain its share once the sanctions on it are lifted. In such a case if Iran too starts to produce too much oil to claim its share, the prices can be seen in 30s if not 20s.  But on the flip side, a 3 way competition (Russia, Iran & Saudi) could turn out to be healthy one prompting the countries to stabilize prices.