Oil Market: What to Expect

Oil has been the hottest commodity for almost 50 years now. Oil gave great financial freedom and power too many nations. But also created distortions in most of them, giving new meaning to the Dutch Disease for many others.

Oil is the commodity that fuels most of the globe today. It also provides an opportunity for investors to trade in oil prices. Although the world is shifting towards a cleaner source of energy, the reliance on oil is so high that there are still many years, probably decades left where this commodity is going to dominate the energy demands of the world.

Trading In the Oil Market

Oil is the most traded commodity in the market globally. The oil market is extremely volatile, which gives an opportunity for investors to make a profit out of it. On the flip side, this makes it very risky as well. There are various factors of demand and supply that determine the prices of oil in the market.

This makes trading in the oil commodity market very risky for an individual who doesn’t have much knowledge about the market. Any investor looking for financial investment in oil should always look for a financial advisor before investing.

Oil Prices in 2020

The year 2020 has been full of ups and downs and nothing like we have faced ever before. We have been at war with an invisible enemy for the most part of the year, and it doesn’t seem to be ending anytime soon. People have been forced to stay at home during this pandemic.

This has hit the entire world economy as factories and offices have been forced to shut down. The commodity market has also been hit, and oil has been hit the hardest.

During the beginning of the year 2020, oil had a pretty strong start. It was trading at almost $61 per barrel. However, once the pandemic started, the trend started to fall. The demand for oil all over the world feel due to the lockdowns imposed by governments in all countries. The supply of oil was not affected in proportion to the fall in demand. This caused a huge over-supply of oil relating to falls in prices.

As a consequence of global lockdown measures due to the Covid-19 crisis, mobility – 57% of global oil demand – declined at an unprecedented scale in early 2020. Road transport in regions with lockdowns in place dropped between 50% and 75%, with global average road transport activity almost falling to 50% of the 2019 level by the end of March.

In April, for the first time ever, the prices of oil fell below $0. That’s right, basically, oil companies were paying you to store oil. It fell to as low as -$37 for a brief time period. Since then, it has recovered to some extent with the average price being $45 per barrel in the month of August.

EIA estimates that an average of 95.3 million barrels per day (b/d) of petroleum and liquid fuels was consumed globally in October. Liquid fuels consumption was down 5.9 million b/d from October 2019, but it was up from both the third-quarter 2020 average of 94.1 million b/d and the second-quarter 2020 average of 85.3 million b/d. EIA forecasts that global consumption of petroleum and liquid fuels will average 92.9 million b/d for all of 2020, down by 8.6 million b/d from 2019, before increasing by 5.9 million b/d in 2021.

Factors that Affect Oil Prices

There are various market factors that affect the prices of oil in the international market. They are:

· OPEC COUNTRIES: It is an organization of the top oil-producing countries in the world. It started off with 5 countries and has 13 member countries now. They control an estimated 81.5% of the entire world’s proven oil reserves and 41% of the world oil production. This gives these countries a major hand in determining oil supply in turn controlling the oil prices.

· US Dollar: Most of the oil traded in the world happens in the US dollar. It is the strongest currency in the world. The price of oil is inversely related to the US dollar. If the US dollar increases, the price of oil falls and vice versa.

· Global economic conditions: Other global economies like the US, China, and India play an important role in global oil prices. Developing countries like China and India rely heavily on oil to meet their energy requirements. The oil demand from these nations has increased, which led to oil prices rising in the early 2010s.

· Alternative energy sources: Developed countries are trying to shift from oil to a cleaner source of energy. This will affect the demand for oil and can cause the prices of oil to fall.

Oil is the commodity that fuels most of the globe today. Although the world is shifting towards a cleaner source of energy, the reliance for Oil and gas – while remaining

needed for decades – will be increasingly challenged as society shifts away from its reliance on fossil.

So you can see how the prices of oil are dependent on many factors. You should have proper investment recommendation done before entering into the oil market. There are financial advisors that can help you with your investment plan.

Oil Price Predictions by year end

After the slump of oil prices in mid-2020, oil has made a sharp recovery. However, the demand for oil has picked up but is still very low as compared to previous years. The lockdowns and restrictions are still in many countries.

The travel bans have led to so many planes being grounded. The restrictions have being lifted slowly, and the demand is growing. Analysts see the demand for oil to be stagnant though throughout the year. They predict the prices to be somewhere between 35 and 40 dollars.

This provides good opportunities for countries like India that import almost 80% of their oil demand. India has been buying oil for cheap now since prices are down and storing them for future consumption. This could help them lower their import bill and help in faster development of the country.

Recent news about Pfizer and Moderna's Coronavirus vaccine, will help push the world economy go back to normal by the second half of 2021, we may see the prices of oil get back in the $60 range due to the sudden spike in demand after the end of the pandemic.

In the long run, prices of oil can rise to even higher levels of $100 per barrel. Developing countries like India, China, and African countries rely heavily on oil for their energy needs. Oil is cheaper than other environmentally friendly sources, and developing countries will continue to use it for many years to come.

This will increase demand even as the western countries start shifting to cleaner energy sources. The energy transition requires significant levels of investment, with material shifts in the pattern of that investment across different energy sources. Oil is here to stay and is not going to disappear, but will fade down in the next 3 decades, some estimates place oil as the second source of energy by 2050 ,well behind renewables.