Over the past 20 months, the oil prices have suffered severe losses. The low oil prices have been caused by the economic slowdown experienced in China that has reduced the world’s second-largest economy’s buying power. Nonetheless, investors believe that the prices have reached a rock bottom with the market sentiments changing due to the recent setup policy measures to stabilize the oil market.
In the past few days, the prices have been volatile at the bottom end due to the increasing US crude oil inventories surpassing the growing bullish sentiments. Nonetheless, the prices of Brent oil have been gradually rising forming an upward trend that has convinced investors that the worst days are almost over in the markets. Though the prices are still significantly low, they have risen more than 30% since February 11 when the prices hit a 13-year low of just above $26 per barrel.
Causes of Low Oil Prices
The high U.S. crude inventories that outweighed the bullish sentiment have raised concerns among investors. The scenario has provided a potential opportunity for the markets to rally making investors hesitant to buy energy-related stocks. In the last week of February, the US crude inventories rose to a record high of 517.98 million barrels. Though the oil prices edge up as confidence grows that market has bottomed, the storage glut comes into an already oversupplied market.
Analysts believe that the current oversupply with reduced demand for oil will maintain the prices of crude oil below $50 a barrel until the end of 2017. Though Russia and Saudi Arabia agreed to freeze the output at January levels, there will be no significant impact on the market. The January and February levels saw Russia pump a 30-year high of 10.88 million barrels on a daily basis.
Additionally, Saudi Arabia is also producing over 10 million bpd doing little to reduce the oversupply in the current market. Though there are uncertain signs of OPEC members and non-members to stabilize the markets, there is a minimal probability of the member states agreeing to a coordinated output cut to reduce the oversupply. Nonetheless, investors believe that the prices cannot drop further spreading a bullish sentiment in the market.
The Low Prices Stabilization Process
With markets shifting their focus to positive headlines, buying from hedge funds has increased significantly. Due to the confidence that the markets have stabilized, Saudi Arabia has raised its oil prices to consumers in Asia by 25cents per barrel for April supplies. The bullish sentiments that are developing in the market also received a boost from the International Energy Agency (IEA) that said that prices seemed to have bottomed out.
Investors have started to buy into the oil commodity markets since they now believe that the only direction for the prices in this sector is up. Reduced production in the United States and signs of financial distress from other OPEC members that signal a potential production cut has made oil prices to rise gradually since February. The cuts have come after many oil companies succumbed to the price rout prompting governments to make the output cut decisions.
The current oil market has strong bullish sentiments with the US reducing its shale oil production. Moreover, the OPEC members are succumbing to the financial pressures on their budgets due to low oil prices making them freeze their production levels. Also, the demand for oil is increasing gradually with the global economy recovering slightly from the tremors of China’s economic slowdown. Thus, the investors firmly believe that oil prices will take an upward trend.