Over the last couple of years the oil price has been the subject of much discussion and extremely negative comment in the press. The price has more than halved over the last couple of years and there were major concerns that we had seen the best of the oil rush and it was time to look towards other forms of fuel as well as green technology. As ever, so-called “experts” have called the end of oil far too early and just lately there have been signs that the price of oil could be moving into a critical area – on the upside.
Chart patterns
After the emergence of what is termed a “golden cross” by chart experts, a situation where the short term average price moves above the long-term average price, it seems that the price of oil could be hitting a critical point. The price has been trading in a relatively narrow range for some time now and while the emergence of the “golden cross” chart pattern is seen by many as extremely positive, it could just as easy go the other way and be seen as extremely negative.
The oil price is dominated by both the worldwide economy and physical output, much of which is controlled by OPEC. Historically OPEC has been fairly unhelpful to markets instead tending to ignore calls to reduce supply and allow members to keep pumping out barrels of oil to maintain their own investment needs. However, a meeting in Vienna last week by OPEC members saw the current output limits extended to March 2018. There was some relief that the output limits were extended but many had expected further tightening of supply to support the oil price going forward.
Can OPEC be trusted?
In the past, an array of apparently groundbreaking rulings by OPEC has been completely ignored by members. The association does not have the best record of controlling its members although there are hopes that this time could be different. The reality is that OPEC seems to err on the side of caution when called upon to slash supply and instead preferring to side with OPEC members. It is difficult to find a balance especially when members will be relying on their oil income in these difficult economic times.
While there are some concerns that the current supply limits may well be broken by OPEC members, so far there is no evidence to suggest this is the case. If members do manage to abide by the extended limits then this could give the oil price the push it needs to leave the downward trend behind and look to the future.
A critical time
As we touched on above, while investors are looking on the positive side with regards to the so-called “golden cross” it is an extremely critical time for the price of oil. We should see over the next few days and weeks whether this is the start of a new upwards trend or whether indeed the short term recovery will fade away. The price of oil is an integral part of many businesses and an increase in the price would not be welcomed by owners as they may struggle to pass on any additional costs to their customers. On the flipside, oil exploration companies would see a recovery in the value of their long-term assets and the oil which they are extracting today.