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Does the rising price of oil offer an investment opportunity?

5th June 2018 Print

Between June 2014 and the end of February 2016, the global oil market experienced a sustained and dramatic collapse. Incredibly, crude prices fell by 40% to just $70 per barrel between June and December in 2014, before further declines saw the value plummet to a record low of $35 per barrel during the first quarter of 2016.

The trigger for this decline was thought to be an excess of supply, particularly in relation to the prevailing level of demand. This encouraged OPEC to take action, by implementing a global supply cap for members and non-members to adhere to.

January saw the price of oil having reached $70 a barrel for the first time in three years, however, creating optimism that that market may be braced for a brighter future. But why is this, and should oil be considered as a viable investment opportunity in 2018?

Why has the Price of Oil Risen?

According to analysts at Reuters, the price of crude oil will average $63 per barrel throughout 2018. While this is slightly low than the value recorded in January, it represents significant, year-on-year growth in an extremely volatile marketplace. Some experts believe that a potential hike in U.S. production could ultimately limit price growth in the international market, but it appears as though the equilibrium between supply and demand has at least been restored for the time being.

As Oanda have showcased, the rise in the price of oil has coincided with OPEC's global production cap, with the cartel's 14 members accounting for around 40% of the world's total output. With non-member nations such as Russia also agreeing a deal to extend the production cuts, it's tempting to believe that this will remain a key driver of price growth in the near-term.

While capping production was a necessary strategy and one that has definitely helped to restore balance and value to the oil market, however, it may not be the only factor that has influenced price increases. It's also important to consider the impact of demand, for example, particularly given that commodities such as oil are always bought and never sold.

More specifically, the recent price of oil has been positively influenced by increased global demand, driven by the robust spending of U.S. consumers and the overall health of the world's economy. Interestingly, the decline in the price of crude between 2014 and 2016 was also influenced by dwindling levels of demand, following a manufacturing recession in China and sustained volatility.

Conversely, the price of crude began to increase incrementally following a robust recovery from China and the global economy, and this is a trend that we may well be seeing with the most recent figures.

The Last Word – What Does This Mean for the Markets and Consumers?

Unsurprisingly, U.S. President Donald Trump took to Twitter to air his views on the current situation, with the former real estate mogul claiming that OPEC were “making oil prices artificially high” and effectively placing too great an emphasis on the role of supply. 

Of course, the President has a vested interest given North America's vast oil resources, with the nation expected to eschew OPEC's recommendations in a bid to optimise production and drive more competitive price points throughout the market.

This, along with the threat of further volatility in the market, may deter investors in the near-term, although this could change if the demand for oil continued to rise on a global scale.

In fact, it could be motorists that miss out if oil prices continue to rise incrementally, as this will lead to higher prices at the pump. In contrast, increased output in the U.S. and nations such as Nigeria could reignite a global production war, leading to lower fuel prices across the board.