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A combination of rising demand and tension in the Middle East means oil prices will continue to climb.
How this plays out in the short term will have a primary impact on the profitability of oil sector investments. One conclusion is already clear. This will once again be a volatile market.
And this time, volatility will be point upward.
That is not to say that the rise will be continuous or without occasional pull backs. In fact, yesterday we witnessed two contrary signals attesting to an ongoing collision of forces.
Both of these are exogenous to market factors, a very important observation to recognize moving forward.
The direct relationship between supply and demand would oblige a rise in oil prices for the simple reason that more end use is moving back into focus.
Both the International Energy Agency (IEA) and OPEC have raised demands projections for the near term. Those levels are now approaching less than 3 million barrels per day of global supply.
Now we are not going to have a crude shortage anytime soon, although there may be some regional constrictions on the horizon. Ample supplies are available for quick pumping to meet rising demand. Nonetheless, there will be a greater use of unconventional production (tight, shale, heavy, oil sands).
And that means the oil coming on market will be more expensive.
Knee-jerk reactions to global events will again pull on demand sentiment. That, in turn, will spike the volatility. Yet this is likely to be more subdued on the down side than at any time in the last year.
Pundits have also introduced the specter of another (or "double dip") recession and fanning the flames of that fear would prompt the price of oil to move south.
The likelihood of a recession is rapidly dissipating and the prospects of these fear tactics are declining along with that reality. Reversals, therefore, while still inevitable, will be short in nature so long as the current underlying dynamics remain. Those are now pointing up.
I have a series of personal indicators used to determine what should be happening with oil prices. There are 10 of them, designed to estimate the actual composition, strength, and direction of pricing movements. For the past month, six of them have been pointing positive. As of Friday (these are calculated at the end of each week), seven are now moving north.
The upward pressure is building, reflecting the overall higher revisions in forecasted demand by IEA and OPEC. Yet we are once again reminded that the oil market hardly operates in a vacuum.
And that leads me back to those two outside signals we received yesterday.