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Have Oil Prices Stabilized After COVID-19 Driven Volatility?

Nick Ferengi's picture
Founder and Editor CAGR Value

Nick is the editor of CAGRValue, a finance blog focused on growth investing, At CAGRValue, we explore the most exciting markets, industries and economies in terms of growth and try to pick out...

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  • Jul 6, 2020
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The oil and gas market has been one of the worst-hit by the coronavirus pandemic. The WTI Crude oil fell at the start of the year from a high of $63.26 to a low of $12.93 before recovering to stabilize just below the $40.00 level. 

Oil prices have remained range-bound $39.00-$40.00 since the start of the month and this trend looks set to hold firm through next week. This creates an interesting investment opportunity for those searching for stability in the market. 

Image via Pixabay

Image via Pixabay

The immediate future of oil prices

From the perspective of short-term investing, traders will be looking to the US API weekly crude oil stocks and the EIA crude oil stocks change in the coming weeks for guidance. The two reports are frequently used by short-term oil investors to try to predict the intermediate direction of oil prices.

Another thing that will continue to affect oil prices in the short-term is the uncertainty surrounding the OPEC+ negotiations about production cuts. Last month, Saudi-led OPEC and allies extended the current record production cuts to the end of July, which signaled stability in short-term oil prices. This has resulted in a steady rise in the price of oil.

The need for output cuts was triggered by the adverse effects of COVID-19, which resulted in a significant decline in the demand for oil. Country lockdowns created bottlenecks in the market with several businesses shutting down and travel activity reducing to new multi-decade lows.

In April when all seemed to be falling out of place, oil prices momentarily slipped into the negative territory, as utility companies started to run out of storage space amid oversupply. Now, the negotiations have yielded significant output cuts, which have helped to boost oil prices. 

Business activity is also on the rise again as more countries continue to relax lockdown protocols. As such, it is ideal to say that the oil and gas market appears to be on a stable path in the short-term. This stability is perfect for any beginner trader looking to get started in investing in the oil and gas market. 

The long-term future of oil prices

In the long-term, the oil market continues to face declining demand amid an increase in the rate of adoption of renewable energy. Some of the leading oil and gas companies have already started to diversify their businesses to ensure that they remain competitive in the long-term.

In a recent statement, Saudi Arabia Oil Company expressed optimism of higher oil prices in the short-term. The company raised the July price for its Arab Light Crude to Asia to plus $0.20 a barrel, up $6.10 from June, Reuters reported. This is an optimistic view of the short-term market prices. However, when the expiry of the production cuts comes at the end of this month, things could change quickly.

This means that the long-term outlook of oil prices remains relatively weak amid a decline in demand and the expected second wave of the coronavirus pandemic. The global is also expected to squeeze by an average of 5% this year. The US economy in particular is expected to contract by 8%. This adds pressure to energy prices with recessionary fears limiting consumer spending.

Conclusion

In summary, oil prices experienced a turbulent period at the start of the year. They now appear to have stabilized and this could continue to the foreseeable future. However, the long-term outlook remains blurry with OPEC+ production cuts expiring at the end of this month unless an extension can be agreed on.

The impact of the coronavirus pandemic will also continue to take a toll on the market to add to the pressure already being exerted by a significant shift to renewable energy sources.

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