Sector News

A new plunge in oil prices: what is next for market?

November 16, 2016

As one of the most valuable and lucrative natural resources in the world, it is little wonder that oil has emerged as such an investible asset. It is also a particularly volatile entity, however, as it remains vulnerable to a precarious balance between supply and demand and geopolitical conflicts in specific regions of the world.

This is something that we have seen all too often over the course of the last two years, has the price of oil that fluctuated wildly amid a host of geopolitical and macroeconomic factors. While investors had hoped that this period of volatility had drawn to a close recently, however, unexpected losses at the beginning of November have highlight further imbalance while also hinting at a declining, global economic climate.

How Has Oil Fared in Recent History?

Throughout 2015, the price of oil dropped alarmingly despite very little fluctuation in the levels of demand for this resource. It immediately became apparent that the decline was instead the result of increased supply, which had driven intense competition and triggered an expected fall in prices.

While the price of oil stabilised throughout 2016, it was not until September that a deal was struck to help drive near and long-term growth. In short, the Organization of the Petroleum Exporting Countries reached a progressive agreement to limit its production to a range of 32.5 to 33 million barrels per day (bpd), which in turn represented the first deal to cap production since 2008. The aim was to constrain supply and manipulate price points, creating a healthier balance between supply and demand in the process.

The results were almost instantaneous too, with oil prices rising by 6% during the next month as the market began to show genuine signs of improvement.

What is the Latest Issue and What Does This Mean for Investors?

Unfortunately, this tenuous agreement did not have the full backing of everyone, with countries such as Iran refusing to cap their production rates. After fraught negotiations, this has created widespread uncertainty in the market, as the lack of a resolution forces others to reconsider their own position. This burgeoning crisis came to a head this week, with oil futures incurring significant losses after Saudi Arabia reportedly confirmed that they would lift the cap on their own oil production rates if Iran continued to defy the agreement.

In practical terms, December West Texas Intermediate oil futures fell by 98 cents on the stock exchange last week, as it headed towards a 10% weekly decline. With the price per barrel also plummeting, the market could well be set for another period of intense volatility and uncertainty.

The question that remains is what this means for the market and oil investors? While it may seem like initially bad news, for example, it is more of a pressing concern for distributors and those that profit through the ownership and sale of the commodity. Investors have far more flexibility, of course, particularly in terms of the precise model that they use to profit by trading oil. More specifically, investors can tailor their strategy to suit the market and ensure that they profit even as prices decline (for now).

Already, spread-betters through ETX Capital are monitoring the market and daily price drops, while also analysing trends and determining the likelihood of further (and potentially more fruitful) negotiations. This data can help investors to back the decline of oil prices, by shorting and investing at a low rate before selling when the market begins to boom once again. This can deliver huge rewards, particularly for those with an in-depth understanding of the market and the type of determinism that can capitalise on inevitable, future growth trends.

Just remember to make truly informed decisions, however, as timing is extremely important when attempting to profit from a depreciating asset.

Ben Barlow is a freelance finance writer specialising in commodities, stocks and shares, forex and ISAs. After studying business at Lancaster University, Ben worked at a number of financial institutions in London and New York and is now following his passion for writing.

Source: Oil Voice

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