Oil has been one of the most volatile assets amongst the traditional asset group. Looking at the price movement of Crude Oil we can see the asset has increased in value by 29% over the past 6 months and 59% since the beginning of the year. As part of this post, we will look at what the influences are behind the bullish movement and what role Organization of the Petroleum Exporting Countries (the “OPEC”) has played.
OPEC fights back against the Top 3
The biggest oil consumers in the world over the past decade are China, the USA and India, which between them use over 35 million barrels a day on average. Over the past 6 months the 3 countries, amongst others, have pressured OPEC countries to look at increasing the supply of Oil due to inflation pressures.
Over the past 12 months the level of inflation has increased above regional targets to areas which economists believe can damage the employment sector and general market conditions in the longer term. Oil is known to be a big contributor to inflation as it can have an effect on most areas which inflation is measured. For example, transport, food transport, manufacturing, and general heating. For this reason, certain states have pressured OPEC to increase the supply in order to keep prices as low as possible
However, this Monday after an all-day meeting between member states and representatives, the organisation confirmed they would not increase supply by a high and sudden amount. Instead, OPEC confirmed they would only continue increasing the supply by the previously agreed amount of 400,000 barrels per day.
Comparison of volatility
To highlight the significance of the price movement we can compare with other assets which have seen bullish price movements. Amazon is one of the most popular stocks in the US equities market. The stock has increased by 10% over the past 6 months, which is less than half the increase of Crude Oil. When comparing the year as a whole, Amazon has increased by 3.10% compared to an increase of 59% for Crude oil.
Within regards to the volatility and price movement. It is great to see strong trends and large increases when generally looking into the market from the outside. However, as a trader and market participant it is also important to look at the volatility level compared to your investment requirements as well as risk appetite.
According to reports on Monday, OPEC remain concerned that a potential further global wave of the coronavirus pandemic could slow the recovery in demand, and therefore they are in no hurry to bring additional volumes of oil to the market. It is important to note that any increased chances of economic and social restriction due to Covid-19, which can affect the demand and therefore the price of both Crude and Brent Oil.
Investors await the publication of a weekly report on the US stocks from the American Petroleum Institute. The last time they rose by 4,127 million barrels, higher than predicted. Above we spoke about the concern regarding demand going forward. However, it is just as important to keep an eye on the level of supply within the market which can be monitored through the Oil Inventories each Wednesday.
The Bullish trend keeps Fighting
Even with taking the above into consideration, any potential risk which OPEC advice may potentially arise going forward, the bullish trend strongly continues. Looking at the bullish trend we can see the price has increased for 6 consecutive days and has not formed a lower swing low or high since the middle of August.
There is no doubt that the price is moving in an uptrend. But the question which many are asking is whether the price is likely to maintain the movement in the longer term. The price is currently close to a 7-year price high which is why the question arises as to whether the price may be above its intrinsic value. The answer lies with how the supply and demand influences are likely to be altered over the coming months. As to whether the price can go higher, yes, it is possible. The price of crude oil steadily maintained a high price per barrel between the years of 2010 to 2014. During this period, we saw the price vary between $79 and $114.
Throughout this post we can see why OPEC is fighting back main users of Oil for large increases in supply. OPEC is set on protecting the price of oil and avoiding a further price collapse as we saw in 2020 where the price collapsed by almost 85%. The collapse was due to the sharp decline in demand and over supplied market due to the pandemic. The main importance is to monitor future developments amongst the main influences of the supply and demand of Oil
We looked mainly at the fundamental elements of analysis but traders wishing to obtain chart analysis are able to receive prepared analysis through Trading Central’s Analyst Views. To visit the relevant page click here.