Chart of the Week – Oil

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Crude oil has officially reached bear market territory after a month of over 20% loss in price per barrel. A barrel of crude oil currently costs $61.57 which marks the lowest price since March. As a common indicator of global economic health, the low price of oil has struck fear in many investors as they worry about what the implications may be on the stock market. After a brutal October for stocks, losses continued at the end of last week as global economic outlook appeared dim.

Prices reached a nearly 5-year high in early October has many were concerned that U.S. sanctions on Iran would decrease the supply of oil in some parts of the world. The sanctions have been put into effect this month but they are not exactly as forecasted. These sanctions are allowing eight nations, including China, to continue importing oil from Iran for the next 180 days. This surprising news has significantly increased the supply of oil and henceforth resulted in a global oversupply relative to what was anticipated. This leads to a supply gap that decreases the price per barrel.

The sanctions on Iran are not the only factor that is leading to a supply gap for oil. U.S.-China trade tensions, rising interest rates, and currency weakness in emerging markets have led to slower economic growth. This slowdown in global growth has decreased demand for oil as many try to decrease input costs due to economic pessimism.

Another long-term factor affecting demand of oil is the movement towards more environmentally responsible energy sources. Solar, hydro, and wind energy are far more eco-friendly sources of energy as they do not release any fossil fuels. However, at the end of the day economics will always play the greatest roll in decision making and as long as oil remains the cheaper option the demand will be there.

Similar to what Saudi Arabia’s energy minister, Khalid al Falih, said this past Sunday, I believe that the current low price of oil is an overreaction to the news that U.S. sanctions on Iran still allow oil imports to eight countries. I believe that oil has reached its bottom and I expect that it will increase in price moving forward. A positive G-20 summit later this month in which U.S.-Chinese tensions are tempered and a trade deal is met would do wonders for the markets opinion on global economic health. I expect that significant progress will be made at this meeting and it will indirectly increase the demand for oil and likewise increase the price per barrel.

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