Is it possible to forecast the oil price?

You can speculate on the rise or fall in the oil price. But it is necessary to be able to correctly predict the future oil price movements. So is it therefore possible to simply make such a forecast over the short, medium or long term? This is of course possible using different methods and here we will explain these different methods and how to use them.


Making a prediction on the oil price using technical analysis:

The major tool that enables you to make a forecast in the oil price is of course the technical analysis; this means the analysis of live charts displaying the prices per barrel of oil. These charts provide us with valuable indications on the movement possibilities of the oil price over the short and long term.

For this, you need to know how to interpret the different indicators that you can find on these charts such as the following:

  • The trends: The trends are easy to detect and correspond to the marked rising or falling movements. The stronger a trend, the more it is likely to continue in time and the same to the contrary.
  • The volatility: This is the strength of the current trend. The higher the volatility, the more probable it is that the trend will continue for a while.
  • Technical support levels: A support level is the lowest level previously attained during a trend. If this level is passed then the falling trend is confirmed and the price will probably continue to drop. If the support level is not crossed then we can expect a reversal with a rising trend to follow.
  • Technical resistance levels: A technical resistance level is the exact opposite of a support level. It is the highest level previously attained during a trend. When this level is passed during a rise, the rising trend should continue. In a case to the contrary, this announces a return to lower prices.

Other technical indicators do exist but they are too complex to cover here.


Identifying the oil trend using moving averages:

The moving averages can be used over long or short periods according to your trading method. They therefore enable you to identify trends over the short and long term.

On the charts, a flattening or reversal in the moving averages enables the detection of a change in the trend. It is also important to pay attention to the position of the spot rate relative to this moving average. The crossing of the moving averages also represents a strong buy or sell signal. For example, a 50 day moving average that passes under a 20 day moving average represents a sell signal and a 50 day moving average passing above a 100 day moving average indicates a buy signal.


Identifying an oil trend with the MACD:

The MACD, or Moving Average Convergence Divergence, indicator enables you to anticipate a reversal in a trend in a more precise manner than with the moving averages, notably for short term movements.

On the charts, the MACD is represented by a signal line and the MACD line. When these two curves cross over we obtain a buy or sell signal. Therefore, when the MACD line crosses above the signal line this indicates a rising trend, and vice versa.

This type of indicator is one of the easiest to learn, technically speaking.


Identifying an oil trend using Bollinger Bands:

Visually, the Bollinger Bands are represented by three curves, one represents the moving average over 20 days and the two others are situated on each side of this major curve at two standard deviations.

This indicator enables the identification of the strength of the current trend. Therefore, a highly volatile oil trend will show larger bands with a major deviation. Conversely, when the trend is weak and unreliable we can see an equally weak deviation with tighter bands.

When the oil price approaches the lower curve this indicates a strong buy signal and vice versa, when it approaches the higher band this indicates a major sell signal.

With this information it is therefore possible to detect both the direction and the strength of the oil trend.


Making a forecast on the price of oil using fundamental analysis:

Another method of analysis that enables you to anticipate the rise or fall in the price of oil is the fundamental analysis. This consists of using non-technical data to predict the reaction of the oil market.

For this, you simply need to consult the economic calendar on which the events are marked that could influence the oil price. Among these events are the following:

  • Movements in oil stocks: Rising stocks lead to a drop in the oil price, and the same to the contrary.
  • Announcements from oil producing countries.
  • Movements in the U.S. Dollar value inversely correlated to that of oil. This means that a strong dollar makes oil less attractive to foreign investors which will tend to cause a drop in demand and therefore the price.

Of course, to make a reliable forecast on the oil price it is judicious to use both fundamental and technical analyses.


What are the long term forecasts for the price of crude oil?

Since the beginning of 2016 the price of crude oil has hovered around 50 dollars per barrel. It did however experience a falling trend to 46 dollars in December 2016 when OPEC prepared to reduce the supply to maintain the prices.  


Since then, the publication of rising American oil stocks has created a major drop in the prices which were followed each time by a rising recovery thereby creating a relative stability in the prices around this psychological threshold of 50 dollars. But should we envisage optimal forecasts in oil prices in this situation?

At present, relatively few investors are taking a buying position over the short and medium term on oil despite the determination of OPEC to keep its prices reasonable. However, a fall in the prices at the same time has captured the interest of investors who see investment horizons further ahead. It is therefore quite probable that the oil prices will again recover and recommence their rise in a long lasting and progressive manner.

This underlying trend is supported by recent statements from the Saudi Oil Minister who recognised that the producing countries need to submit to reductions in their output which should lead to a significant drop in supply.

Although there are numerous indicators that tend towards a holding of the oil price around 50 dollars and under the 60 dollar bar, other signals tend to favour a recovery and a rise over the long term. 

In fact, on one hand we can observe a significant rise in the production in the United States and Russia, the two major producers that are not members of and therefore not governed by the regulations of OPEC. Due to this fact, the stability of the oil price does not depend solely on the wishes of Saudi Arabia, Venezuela, and the other members of the organisation that accept that they need to reduce their production even while the United States and Russia hold their extraction at an elevated level. As noted earlier with the explosion of shale oil and its repercussions, this iron hand risks strongly influencing prices to go higher or lower depending on its resolutions.

In any case, signals that are contrary and therefore favourable to a recovery in oil investment are currently issued by market analysts. The French AIE (Agence Nationale de l’Energie) indicated at the beginning of 2017 that the global demand for oil should be over 100 million barrels per day in 2019, a major rise compared with current requirements. The risk therefore is one of underinvestment due to the current situation which will surely lead to an explosion in the oil price sometime over the next two years.

It is the same for forecasts relating to demand over the longer term with a rising trend predicted until 2034 at least.

How to use these forecasts to trade in oil?

All the CFD brokers offer the opportunity to trade in oil and provide the necessary tools for forecasts such as charts with the indicators and an economic calendar.

Trade in oil online!
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