Oil prices are at an 8-week high, with a host of factors creating the perfect environment for the commodity to re-enter the bull market.
Brent oil is still hovering above the $50 per barrel mark while crude oil is above $48 per barrel:
While this is still far below the $100 per barrel highs of June 2014, it is a marked recovery. Oil prices threatened to hit $20 per barrel at the beginning of this year while recent upward price movements have struggled to breach the $50 per barrel mark.
But now oil prices are back in a bull market.
The reasons why are:
1. The US dollar is weak — Historical market fundamentals show that usually when the US dollar moves in one direction, oil moves the opposite way. This is because oil is quoted in US dollars and the US is the biggest importer of it.
2. There are renewed hopes of a global supply cap — Oil prices are historically weak because supply is flooding the market. Saudi Arabia produces so much oil that it has the power to move prices and it is the largest country in the 13-member OPEC cartel of oil producers. It has been pumping out oil at record levels despite oil prices being in mid-double digits.
However, the oil price is now being supported by renewed hopes that Saudi Arabia and Russia could try and stabilise the world’s most important commodity. Saudi Arabia’s Energy Minister Khalid al-Falih said last Thursday that the country was ready to take “any possible action” to rebalance the oil market.
3. US inventory was lower than expected — Saudi Arabia’s decision to pump out so much oil and depress prices is hurting the country’s economy, which earns a huge amount from oil sales. The only plausible reason for it doing this is to kill off direct competition from the likes of the US.
This seems to be working. US oil stockpiles unexpectedly fell by 2.5 million barrels in the week ending August 12, according to the Energy Information Administration’s (EIA) report this week. Last week, for the first time since January 2014, the US imported more crude oil than it produced, thanks largely to a surge in OPEC supply. This is what Saudi Arabia wants — for the US to be producing less oil and buying more of it from the Middle Eastern country.
4. Hedge funds sent out a clear signal about oil prices — Fund managers have reversed their short positions on oil, meaning they are no longer betting against a fall. This adds to the support in oil prices.
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