Oil was once all about the Middle East. It’s what has given the riches to the Saudis, and we saw prices climb at rapid rates in the 2000s before crashing down in the last 18 months. Oil prices have plunged 68% in the last 18 months, and prices have fallen to nearly $30 a barrel.
Interestingly, oil prices have a very strong impact on the global stock market. Just today, oil is up 3.5%, but it’s so volatile at the moment that it’s not a sure bet for investment in 2016.
Many experts believe that oil prices will rebound in late 2016, and there has been news that Russia will meet with OPEC if they decide to have a meeting to help curb the oil supply glut. It’s expected that Saudi Arabia’s plan to push out competitors will take time, but it will work in the long run. We are already seeing that many producers in the United States have stopped drilling because prices are simply too low to justify the cost of drilling, or fracking.
The biggest question is: “what’s next for oil?”
Goldman Sachs (GS) believes that oil prices in February will reach an average of $30. But this figure was provided in December 2015, and it is still very uncertain where oil prices will actually be by the end of February. A rebalancing of the global oil market is really not materializing due to OPEC’s reluctance to curb output, and the introduction of Iran back into the global oil market.
Oil will likely continue to decline despite having random spikes in prices as seen today. The decline in prices may not be enough to reduce the global supply glut, causing oil prices to remain low all throughout 2016. Meaningful production cuts are unlikely to occur with the reluctance of OPEC to curb production levels, and until OPEC decides to reduce these levels, oil will continue to be on the decline.
We’re also seeing a major push for solar energy all throughout the world. Morocco is building the largest solar farm that will be able to produce electricity for 1.1 million homes, and countries around the world are following the same trend. This may mean that the overall demand for oil will continue to diminish as the year continues.
Oil prices can’t fall forever, and many long-term investment managers believe that oil will rise back up to $60-$80 a barrel at some point. Societe Generale is betting on oil climbing back up to $56 a barrel by Q4 2016.
While the future of oil may remain uncertain, it can only fall so low before rebounding. It may still decline an additional 50% before reaching $20 a barrel, but it will rise again. One thing is for sure, and most analysts agree, it is extremely unlikely that oil prices will reach $100 a barrel again.