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Should Oil Investors Prepare for a Pullback in Prices?

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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  • Mar 15, 2021 9:41 pm GMT
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The price of oil has rallied to a new 28-month high of about $65.93 for light crude oil and nearly $70.00 for brent crude oil. The current rally is one of the sharpest that the oil market has experienced since plunging early last year. 

The rally is primarily driven by the OPEC+ members’ decision to keep the production cuts going despite the expected recovery of the demand markets. As such, it makes sense that investors view this as an opportunity to invest more in oil and gas products going into the second quarter of the calendar year.

However, oil prices are bound to pullback at some point as they have demonstrated over the years.

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Reasons why oil prices could pull back

The most obvious catalyst for a pullback will be when the OPEC+ members decide to end the production cuts amid the continued recovery of the global economy. Coming into March, analysts expected OPEC to end the production cuts but instead opted to continue. However, it is only a matter of time before the output cuts come to a halt, which could trigger a significant pullback in oil prices.

Another factor is likely to be that short-term investors will look to take profits after such a significant rally. Day traders on commodity trading platforms like eToro profit from the up and down movement of commodity prices, which means that some of them will be counting on a pullback. You can read eToro review on various platforms to grasp why this factor could play a part in the next pullback.

The other reason why oil prices could pullback is the persistence of the coronavirus pandemic with new strains emerging all over the world. Current vaccines could still be effective against the new strains but there is also a chance that medical researchers may have to come up with new vaccines. This could take some time, which could force more countries to another round of lockdowns.

It is not inconceivable that all these factors, rather than just one or two of them, could happen at the same time. This would be more devastating for oil prices. 

Reasons why oil prices could continue to rise

While some oil investors may be anticipating a potential pullback, there is also a case for a potential continuation of the current rally. The coronavirus pandemic may be with us for a while before it is completely eradicated. But this time, things are different. The world appears to have learned how to live with the virus, which means some countries may be reluctant to take strict measures to combat the spread of the virus. 

In addition, some countries will begin to weigh the potential impact of an economic lockdown against the adverse effects of the virus should they remain open for business. Recent studies show that there is an inclination to remain open for business and this is good for oil prices.

Another thing that could boost oil prices further involves measures taken by various governments to combat the adverse economic effects of covid-19. A good example, in this case, is the US new rescue plan which saw the signing of a new stimulus package worth $1.9 trillion. This will inject more money into the economy thereby maintaining the purchasing power of the people. This could help limit the potential slowdown in demand for petroleum products, which will be good for oil prices.

Conclusion

In summary, oil investors will be anticipating a potential pullback after such a significant rally. However, there are also enough points to support the case for the current rally continuing. Whichever side the market moves in the coming months, it will be interesting to see how things shape up.

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Matt Chester's picture
Matt Chester on Mar 15, 2021

However, oil prices are bound to pullback at some point as they have demonstrated over the years.

Oil always does bounceback, and for sure it will bounce back at least towards where it was pre-pandemic, but one has to wonder what the turning point will be where it never gets back to the heights it once was at. There's still a chance this past year will be a turning point that doesn't 'kill' the oil industry, but serves as an inflection point where the previous heights are never reached. Then again, the industry could prove resilient even through it which would beg the question-- what will be the pivot point? 

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