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Where are the oil prices headed?
By admin February 13, 2015

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Photographer: Marwan Naamani/AFP/Getty Images

The first week of February witnessed a huge gain in oil prices, after the decline of 52% in the past seven months.

Oversupply is one of the main reasons of this huge drop in prices. At the same time, OPEC’s (Organization of the Petroleum Exporting Countries) decision to not cut oil production, which was made at the end of last year, also contributed to the further fall of oil prices. The explanation from General Abdulla al-Badri, the secretary of OPEC, is that the market mechanism will bring the price back. If oil companies cut their budget under the pressure of low prices, the production level would drop eventually.

Indeed, several oil companies have already planned to cut their budgets and workforce. In addition to that, the total number of oil rigs in the U.S. has gone down by 25 percent since October last year. The political environment of a country also plays a role. For example, the threat of violence in Libya, targeting the oil sector, made many oil companies shut down their production. As a result, the production of oil in Libya declined to 325,000 barrels per day in January this year from 900,000 barrels per day in October last year. All of the above facts can be seen as a sign of a future rebound of oil prices.

The rebound of oil prices in the first week of February boosted the confidence of investors, showing a positive outlook for the oil industry to some degree. The stock prices of oil companies like Halliburton Company, Chevron Corporation and BP all experienced an increase of over 5%.

Nevertheless, the volatility of the oil prices cannot be neglected. The uncertainty of the prices seems to be still out there, given the wild swings that have taken place. The EIA (Energy Information Administration) “Weekly Petroleum Status Report Highlights” shows that oil stockpiles across the U.S rose to a level of 413 million barrels at the end of January this year, the highest level in at least 80 years. Therefore, there is still an oversupply in the oil market, exerting pressure on the rising prices. Under this situation, investors may suffer from a big loss if they fail to react to the change of oil market.

Interestingly, the behavior of investors themselves could explain the volatility of oil prices in some ways. Speculators never move their eyes away from the oil market. Thus the up or down of the oil prices could be simply because of their speculative action. Furthermore, because of the economic downturn due to global financial crisis and sharp drop in oil prices, not only most of the developed countries but also some oil exporting countries are adopting easy monetary policy. As a result, more speculative capital flows into the economy, creating excess liquidity and chasing the best return. The oil market, as one of the most important commodity markets, is the target of this extra capital without doubt. And it is the growing amount of speculative capital that makes oil prices become more volatile.


Thanks for sharing !


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