Oil prices have taken quite a tumble over the past two years. The summer of 2014 marked the beginning of an OPEC war on oil in order to maintain their cartel’s grip on the global oil industry by inflation supply and depressing prices. Since then, investors have had to deal with oil prices that dipped as low as the mid-$30’s per barrel after enjoying years of it trading in the $90 to $100 range.
The industry looks like it may have finally turned a corner in the past several months with oil prices slowing ticking back up to trade in the high $40 to low $50 range. But it seems to be having trouble staying above $50 as U.S. crude stockpiles rise and the global economy continues to deliver mixed data making it difficult for investors to bet on whether the bull market will continue or turn into a bear market.
Where oil is headed next is one of the biggest questions investors have right now. The industry has struggled to stay afloat with prices being so low for so long and many are wondering how quickly the recovery will be.
The Case for Triple Digit Oil Prices
The discovery of new oil reserves has hit a 60 year low according to the latest reports. Over time, the lack of new reserves could create a lack of supply. Factor in the years of depressed prices and a price shock could propel oil much higher in a short amount of time.
OPEC is losing control of the oil market as well as putting the laws of supply and demand in the driver’s seat. Because many oil companies have cut costs and production, even a small reduction in supply could create a volatile price shock. The lack of new oil fields being developed could be an issue down the road.
One of the strongest signs that oil may return to $100 levels is the recent buying activity in hedge funds. Contracts dated up to four-years out that only pay if oil hits $100 are being bought. Evidence for the bullish sentiment is the International Energy Agency forecast that non-OPEC oil supply will suffer the largest decline in two decades sometime within the next year.
While many investors are betting that oil will steadily rise over time, others have their doubts. China’s booming growth over the past few decades has been a major reason why oil prices have soared. Unusually high growth led to increased demand for energy products, and China’s subsequent decline is one of the biggest reasons why there’s a been commodity glut dragging prices down.
The growth vacuum left by China needs to be filled before oil can truly regain lost ground. India is the most likely candidate, but the country isn’t ready to put up the kind of growth China did. Without strong fundamental support, oil may cap out well below $100 per barrel in the next few years.