Evolution of oil prices

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You often hear about oil as a profitable, long-term investment due to bullish oil prices. However, to better understand how oil prices operate, and to thus better assess their rise prospects, here's a reminder of their historical evolution and some practical explanations.

 

Brief reminder about oil as an asset:

Before discussing the historical development of oil prices, it is important to remember how supply and demand for this asset actually operate. Indeed, we know that oil is considered a raw material widely used by the global industry, and that its production is spread over several countries such as Russia, Saudi Arabia and the United States. These are followed by the production of North Sea's Brent oil. Due to its scarcity, this type of oil has become more expensive than WTI, which is widely traded in the financial markets.

Regarding oil demand, it obviously comes from all regions of the world, although certain countries like China are very large consumers because of their strong industrial growth. Among the major importers and consumers we find the European Union, Japan and the United States.

From these data, specifically the ever-increasing demand, experts continue to argue that crude oil is expected to reach its production limit by 2050, posing serious problems as peak production is attained. It is therefore logical that prices follow an upward trend. Oil is indeed a non-renewable natural resource that is doomed to depletion because of large extraction volumes.

 

The phenomenon of oil shocks and their influence on the evolution of prices:

We often hear of oil shocks as moments prone to sudden surges in oil prices. Many of these shocks have indeed marked the history of the black gold, starting with those of 1973 and 1980, which led to a dramatic rise - three-fold- of oil prices in a few weeks. The barrel reached $ 40 in 1980, to oscillate between $ 15 and $ 35 between 1986 and 1999.

The Gulf War in 1991 led to a further price appreciation. From this period onwards, the price of oil been exclusively on the rise, with the 3rd oil shock of 2003 and peaking at $ 145 in 2008.

 

Dips are frequent but short-lived:

Even if the long-term trend of crude oil remains firmly bullish, this broad trend is sometimes punctuated by bearish micromovements. This was the case for example between 2008 and 2009, with a drop from 145 to 40 dollars a barrel. This decline has nonetheless given way to a further increase up to $ 100 in 2011.

While supply and demand are relevant factors, they are by no means the only ones influencing oil prices. Energy policy decisions, for example, also play an important role in this respect. Among other factors, this largely explains the decline in 2011 following the announcement of the IEA to provide 2 million barrels per day for a month.

On the other hand, the effects of rumours and various conflicts currently affecting producing and consumer countries tend to influence oil prices. As said, however, the long-term trend remains firmly bullish.

 

Recent variations in the oil price:

Over the last few years the oil price has experienced strong variations. This started in 2008 with a real shock to the oil sector that led to a major rise in the oil price that started in 2003 but accelerated with a major rise in demand from the emerging countries experiencing strong economic growth such as China and India. The global economic crisis of 2008 was the spark that ignited the explosion of the oil prices.

In just a few months, between January and July 2008, the oil price rose from 96 dollars per barrel for Brent oil to 144 dollars. But just after this rise the oil price experienced a major drop from 130 to 40 dollars between July and December of the same year. In response to this fall OPEC requested oil producing countries to reduce their production in order to maintain their revenue. This caused the price to stabilise around 80 dollars.

Around 2010, a recovery in economic growth and a significant rise in the demand for oil by the importing countries were significant influences in a new rise in the oil price. Also, the geopolitical problems that affected the Arab world in 2011 provoked worries relating to the production abilities of certain countries which caused a new major rise with the price per barrel of Brent attaining a peak of 128 dollars in March. In 2013, the price per barrel stabilised around 100 dollars.

In 2014, we observed a new major drop in the oil price that fell to below the 50 dollar threshold due to the major rise in production of shale gas in the United States despite a continuous rise in demand. Concurrently, OPEC, which normally reacts to this type of situation by limiting production, decided through the influence of Saudi Arabia to maintain its production levels in order to oblige the American shale gas producers to reduce theirs. Against the background of this tension, the price per barrel of Brent crude oil fell again to 30 dollars at the beginning of 2016, a new low level since 2003.

However, and despite the discontent caused by this drop, we observed a revival in the price of black gold at the beginning of February 2016 with a peak of 50 dollars per barrel in the month of June. This recovery was due to the decisions taken by Saudi Arabia, Venezuela, Qatar and Russia to block their production, as well as investors who took strategic positions thereby reaping the benefits of purchasing at a low price.

 

How is it possible to anticipate future movements in the oil price?

To invest in oil it is important to know its historical movements to ensure that you can anticipate future variations in the price.

According to market specialist analysts, the recent drop in price experienced by crude oil has caused a fall in the number of investments which will normally lead to a net increase in the price, over time. 

Over the long term, a strong economic growth is foreseen with a net rise in the global demand for energy which will enable the oil price to continue rising in the green. New energies do not yet represent a significant threat to oil which still enjoys a major demand from industry. In fact, the global demand forecast is still rising with an expected increase to 4,660 million tons between now and 2035 compared with only 4,100 million tons in 2011. The percentage of oil in the total fuel used should however drop slightly to 27% compared with a current level of 31% due to an increase from gas.

It still remains quite complicated to precisely forecast the future movement in oil prices such as the strong movements registered in recent years. This is due to the many factors that influence the price such as geopolitical events, fuel energy innovation techniques, decisions taken by OPEC, and the global growth rate, any and all that can strongly affect the price one way or another.

This is why we recommend you invest in oil over both the short term and long term so you can benefit from the intermediary fluctuations in this particularly volatile commodity. To do so, don’t hesitate to use the technical analysis and fundamental data available from the economic calendar as these will assist you in implementing effective day trading strategies.

Investing in the price of a barrel of crude oil:

The price of a barrel of oil, as you have undoubtedly noted, differs greatly and sometimes in only a short time which offers great opportunities for profits for investors. You too can speculate on the price movements of a barrel of oil using CFDs.