Amid the recent frenzy over Greece and China, you could be forgiven for missing the turmoil in another key market – the oil market – this week.
After collapsing at the end of last year, the price of oil had been recovering. From a low of around $45 a barrel in January, Brent Crude had surged to over $65 – an increase of 45%.
Yet in the last few days, prices have been tumbling again, falling as far as $55.
Will it continue? And how might you profit from it?
The forecast suggests a blizzard of money printing
What’s rattled the oil market? It might be easier to ask: “what hasn’t rattled the oil market?”
In part, it’s Greece. In a ‘risk-off’ environment, oil suffers as traders fear for global growth and favour the US dollar, which tends to hit commodity prices in general.
And of course, concerns over China’s growth are also bad news for commodity prices. After all, it was demand from China that drove the decade-long supercycle that started in the early 2000s, as my colleague Dominic Frisby noted earlier this week.
The thing is, without wanting to be too simplistic about it, both of these crises – the China crash and the fears over a Greek exit – are likely to encourage one specific response from the authorities: more money printing.
China is already intervening heavily in the market. As for Greece, it really does look like, one way or another, the situation will be resolved – or at least make some genuine progress – by the time this weekend is over.
So chances are that the ‘risk-on’ trades – including oil – will make a comeback, either as a result of improved sentiment or because another blitz of printed money hits the market.
Supply and demand in the oil market
Of course, oil’s woes aren’t just down to Greece and China. There’s the question of supply and demand. If Iran signs a deal with the US over its nuclear programme, then a large supply of oil could return to the market.
That said, it’s easy to overstate the impact of Iran. For a start, talks remain deadlocked. There are still hurdles to overcome, and Iran has reneged on promises to end its nuclear ambitions many times in the past.
Even if a deal is agreed, it will take time for the sanctions to be lifted. In all likelihood, it could be at least a year before large amounts of Iranian oil hit the market. And even if exports return to their pre-sanctions level, it would still only add 1.4 million barrels a day to production, an increase of 1.5%.
Meanwhile, hopes of a continued surge in US oil production look misplaced. True, the number of US rigs in use has risen recently, with a few shale producers thinking about restarting production. But that’s following on from a massive collapse – the total number of rigs in use is down from a peak of 1,600 to just over 600 now.
And although shale oil has unquestionably transformed the oil market, the main US energy agency (the Energy Information Administration) thinks that production has peaked and will decline throughout this year and the next.
There’s also the demand side. The drop in prices has helped to drive up demand for oil. The International Energy Authority has noted that, after a slight fall in recent years, oil consumption is back at record levels.
Part of this is down to the fact that lower prices are making people and companies less focused on the need to conserve fuel. However, it’s also down to the fact that the US economy is recovering. Indeed, much of the growth came from American drivers, as well as a surge in Chinese demand for gas-guzzling SUV’s.
So while we’re unlikely to see $100 a barrel again soon, there are also good reasons to think that the outlook for oil is less gloomy than some expect. How can you profit?
We’d stick with the oil giants who are able to make money, even in current circumstances, while having enough cash to pick up those minnows who have fallen on hard times. I’ve taken a closer look at one of the most appealing in the latest issue of MoneyWeek magazine. Get your first four issues free here.
• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.