For the past year, oil prices have been more volatile than ever:
Every time something goes particularly wrong, or particularly right in some cases, investors everywhere become emotional and either buy in or sell out, often against their better judgment.
The fact of the matter is that most of these are short-term moves. My readers and I know better than to panic at every month-long downturn. The long term is where the real money lies.
That said, some of the reasons for oil’s tumultuous year are worth keeping an eye on, even if their effects seem short-lived. Here are the top five reasons oil won’t be calming down for a while yet.
1. Stockpiles on the Rise
U.S. stockpiles get extra attention now that the country is going up against the biggest exporters on the market. Often enough, higher stockpiles are cited as a sign that no one’s buying and demand is plummeting.
Right now, the U.S. is storing more than 1.3 billion barrels of crude oil and petroleum products, not including our emergency stash, the government’s Strategic Petroleum Reserve.
That’s higher than it has ever been. But it’s not because no one’s buying. Rather, it’s because the shale boom has taken off in full, and exports have only really just begun.
But speaking of exports…
2. Oil in Asia
Global oil demand and consumption is increasing all the time. But that’s hardly going to make a catchy story.
So instead, many people are focusing solely on Asia, and China in particular.
That’s fair, given that it’s the world’s largest energy market and has been the world’s top crude importer since U.S. shale allowed the country to cut back. Today, it’s all about how the energy market in China is developing and who’s going to benefit most.
Saudi Arabia and Russia are both hot on the trail, offering Chinese buyers new deals in hopes of catching the most Asian market share.
And they’re not the only ones…
Iran, still rushing to reclaim exports it lost when sanctions went up against its business years ago, is expected to reach new records this year. Estimates say China could import around 4 million barrels more per quarter as compared to last year, meaning Iran is stealing market share from right under Saudi Arabia’s nose.
Of course, there are other forces at work that may cut into that progress…
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3. The Deal With OPEC
It may seem weird to have put this one in the middle rather than at the top, but hear me out: it’s not as paradigm-shifting as it seems.
We’re still in the early stages of the oil recovery, and OPEC is on thin ice. More than one member country took a huge economic hit with the drop in oil prices, and Saudi Arabia is among them.
The deal, which included not only OPEC but a number of non-member countries, was a landmark agreement. Few saw it coming, and hardly anyone expected it to work.
But work it has! Just not in OPEC’s favor.
Whether or not we see the deal extend beyond May this year, the cartel has already lost.
You see, while prices have indeed gone back up — fluctuation around $50 is better than falling back to $23 any day — both Russia and the House of Saud have had to give up market share to the newest swing producer…
4. U.S. Production Capacity
North American oil and gas rigs have nearly doubled since this time last year, according to Baker Hughes. As of April, the region is just short of 1,000 rigs.
Often, the bears will take this as a sign that oil’s recovery may already be over. They forget that much of the production increases seen from the U.S. are still being made up for by cuts from OPEC.
As I said, this is the reason for the jumping stockpiles. U.S. production and exports are still ramping up, and all this new supply has to go somewhere in the meantime.
And why is the U.S. flourishing while OPEC flounders?
5. The Price of a Barrel
Production capacity is one thing. You can add more rigs to an oil play any day.
But how long those rigs will last depends on just one thing: production price.
If it costs too much to get the product out of the ground, operations grind to a standstill. It’s exactly what took most U.S. shale plays down a peg when the rout started two years ago… all of them except the resilient Permian Basin, of course.
The Permian stood alone in increasing production even as rig counts dropped off a cliff, not only because it held massive reserves, but because they were easy and cheap to get.
Today, most of the country’s climbing rig count is coming from the Permian, because producers have realized that’s where the biggest developments have yet to happen.
Until next time,
Keith Kohl
Check us out on YouTube!A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
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