Why the oil price is set to slide

by , 04 July 2018
Why the oil price is set to slide
At the rate, the rand is weakening, and with a stronger oil price, we could see R20 petrol by end of 2018.

At least that's what some economists are saying.

But if it happens, it won't be due to the oil price.

In fact, I foresee that the oil price is in for a dip soon…


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The oil price is up in a straight line for the past year
 
That’s a brave statement to make considering that oil is up in a nearly straight line for the past year, just drifting higher and higher.

This rally has largely been attributed to the Saudi Arabia-led oil cartel OPEC. Along with Russia and a few other countries, OPEC has done everything possible to push oil prices higher over the past 18 months.
 
The group agreed to slash its own oil production beginning in early 2017. And unlike similar agreements the group has made in the past, most members actually followed through this time.

The group produced roughly 2 million fewer barrels of oil per day over the past year. And as it hoped, oil prices have moved higher... from around $50 per barrel when the cuts began, to  $70 levels today.


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Even though OPEC cuts production – oil production in the US is rising

OPEC might have cut oil production by nearly 2 million barrels per day. But the US has seen increased oil production ever since.

And the higher the oil price goes, the more (and faster) US oil production rises.

According to the Wall Street Journal “U.S. production has grown at a record-setting pace this year, hitting 10.9 million barrels a day this month after oil prices exceeded $70 a barrel for the first time since 2014. That makes the U.S. the world’s No. 2 oil producer behind Russia, but ahead of Saudi Arabia.”

So, what I’m saying is the main reason for higher oil prices over the past year ie. lower production, isn’t entirely true…

Where OPEC has cut production, the US has picked up.

Meanwhile, we're now seeing signs the deal could finally be faltering. Recently, reports indicated both Saudi Arabia and Russia – by far the two largest producers in the agreement – have begun producing more oil than promised.

In fact, a recent meeting by OPEC indicates Saudi Arabia, Russia, and other OPEC countries could imminently increase oil production again by about 1 million barrels per day.

It’s become a fight between holding market share vs the attractiveness of the oil price.

But it’s obvious what’ll happen once OPEC increases production. Oil markets will be flooded, and the oil price will drop once again…


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Markets are still overwhelmingly positive about oil

If you do a simple internet search about oil price forecasts it’s nearly impossible to find any negative comments.

Even considering OPEC’s production increases, people are saying they expect the oil price to rise further this year.

According to a Bloomberg report: “As prices have surged, the market has become increasingly one-sided. There are just over 20 speculative longs for every equivalent short for Brent at the moment, near the highest level since ICE began publishing data in 2011. The number of outright bearish bets has fallen by 82 percent since last June.”

Now that might sound bullish for oil…

But what happens when EVERYONE that can buy into oil going up, has done so… And then oil production increases, flooding the market.

Traders then need to exit their long positions, and possibly even go short again.
And that’s bad news for the oil price.

But it’s good news for South Africans…

The rand has weakened against the dollar, so the higher the oil price the worse our petrol prices look.
Mines specifically use lots of fuel in their operations. So lower fuel prices helps them significantly. Especially while commodity price stay strong.

I for one am happy betting on commodities like copper and coal – especially when we see the drop in the oil price coming…

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Why the oil price is set to slide
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