Is Oil’s Price Rise Speculative?

Oil Price on the Rise

Oil prices have made a real come back in the latter half of this year.

Since its low on 22 June, the basket of OPEC (Organisation of the Petroleum Exporting Countries) crude oil prices has rallied more than 43%.

In the last 12-months, the same basket is up more than 36%.

crude oil price

Source: Quandl

Why has oil suddenly rallied more than 43%?

Largely it’s due to speculation.

As reported by Bloomberg:

Speculative inflows have been a central feature of the rally in oil prices since the summer. The whipsaw in sentiment, fuelled by a mixture of OPEC recommitting to supply cuts and the resurfacing of geopolitical concerns, is striking. Break down the long (buy) and short (sell) positions for managed money and you can see the swing between elation, despair and elation again, all in the space of this year.

Take a look at the long and short positions since 22 June.

oil price

Source: Bloomberg

The amount of long positions (buying) has increased 48%, from 745 to 1,103 million barrels.

Over the same time, the amount of short positions (selling) decreased 68%, from 358 to 113 million barrels.

Bloomberg continues:

‘…further gains require catalysts beyond business-as-usual from OPEC and its associates.

These could come from stronger demand or lacklustre U.S. production growth — something OPEC appears to be counting on, especially — or more geopolitical tremors. The latter may well help define 2018, given the pace of change in the Middle East and the mixed messages coming out of Washington when it comes to diplomacy in the region.

Absent such impetus, those billion barrels could turn from rising tide to deluge.

Bad News for Oil Stocks?

This might also be bad news for oil stocks.

Aussie oil and gas businesses Santos Ltd [ASX:STO] and Woodside Petroleum Ltd [ASX:WPL] have climbed 31% and 9% in the last three months.

aussie oil and gas

Source: Google Finance

Much smaller oil and gas companies like Calima Energy Ltd [ASX:CE1] are up even more. Since mid-July, CE1 has rocketed up 363%.

If oil prices were to fall substantially, then all three stocks might follow it down.

Of course the opposite could happen. Oil prices continue to climb as US production slows down and growth nations like China continue to demand more energy.

I’d suggest you play it safe for now.


Härje Ronngard,

Junior Analyst, Markets & Money

PS: Commodities prices came back in 2016 and rallied hard heading into 2017.  Could they continue to rally heading into 2018?

Our resource analyst, Jason Stevenson thinks so. Jason is one of the sharpest minds when it comes to the resource sector. And he’s written a report about his top 10 mining stocks trading on the ASX right now.

Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.

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