The price of oil took a one-two punch during the first two months of 2020, falling almost 26% year to date.
And trading at just over $45 per barrel right now (a 14-month low), crude is a screaming buy.
The first factor that sent oil plunging beginning this year was an expected oversupply. Late in 2019, the IEA said global crude inventories were expected to rise regardless of deals between OPEC and its exporting allies to expand output cuts. In a December report, the IEA wrote:
Despite the additional curbs and a reduction in our forecast of 2020 non-OPEC supply growth to 2.1 million barrels per day (bpd), global oil inventories could build by 700,000 bpd (barrels per day) in Q1 2020.
So the market was already nervous about glut supplies.
Then came the market correction.
If you’ve been reading Energy and Capital recently, you know that I believe the coronavirus had little to nothing to do with last week’s big market correction. As I’ve stated many times last week, the market was due for a correction with or without coronavirus.
Either way, the market did correct. And that led to a further drop in oil prices.
For the year, oil prices have fallen from $61.10 to $45.26 per barrel (at last look) creating a screaming buying opportunity for energy investors.
First of all, oil and other commodities aren’t like stocks — they have no short-term chance of being completely worthless. Oil, gold, grains, meats, softs… These things won’t go to zero. And that’s simply because they are absolutely necessary to global markets. Stocks, on the other hand, are always at risk of going belly-up.
On top of that, oil is perhaps one of the most manipulated commodities on the planet right now. Its price manipulated through supply cuts from the likes of OPEC as well as through currency values, in particular the U.S. dollar.
The United States is able to manipulate oil prices because crude is priced in USD. Decreasing the value of the dollar puts upward pressure on oil prices, and vice versa. However, tinkering with currency values has wider implications, which would result in other sectors being affected. So it’s not always in the best interest of the U.S. to tinker with USD values.
In the best-case scenario for the whole of the U.S. economy, the value of the USD remains very stable — not increasing or decreasing very much over the long-term.
Besides, rising oil prices are a double-edged sword for America. On one hand, increasing crude prices means larger profits and an expanding American oil sector, resulting in jobs and economic development. But on the other, rising oil prices can prompt economic concerns being as energy costs are among the biggest concerns for businesses.
OPEC has much more interest in seeing higher oil prices.
According to OPEC’s website, the cartel controls almost 80% of the world’s oil reserves, with the bulk of those reserves in the Middle East. Meanwhile, OPEC currently accounts for about 45% of the world total crude production.
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So if OPEC really wanted to drive prices higher — and if it can successfully get the whole of the group to comply — they absolutely could at any time.
Of course, this begs the question, why aren’t they doing something now to push oil prices higher.
Well, they are.
The Financial Times reported last week that Saudi Arabia is pushing for production cut of 1.2 million barrels per day, which is much more than expected by the IEA and other energy groups. Those cuts may be announced as early as this week.
The trouble for the cartel is production from non-OPEC countries like Russia, China, and the United States, which are some of the largest crude producers in the world.
Right now, I would venture a guess that OPEC is waiting for markets to calm down after last week’s sell-off. But going forward, I expect to see OPEC make moves to push oil higher into the $60–$80 per barrel range. And from here, that could mean a sizable profit for oil investors.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bull and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.