Crude oil analysis

The importance of oil to the world is unquestionable – the world depends on oil to work. It is this important role that oil plays which gives it influence over many areas of the economy, and those include the Forex market. Here, we get to see how shifts in oil prices also cause changes in the strength of countries because of their use of oil. On one hand, the exporters benefit from rising oil prices while the importers wish for the opposite, and you can observe this push-and-pull in this chart below:

Events that changed the value of oil

As seen on www.topratedforexbrokers.com, The most important news that affects the strength of oil comes from statements by OPEC members. Several meetings are held each year to discuss about oil outputs in order for the member states to retain their revenue. However, demand for oil being produced by OPEC nations was declining, and the member states felt threatened. They took actions to regain their power, and these led to the decline in global oil prices. The US was using fracking to extract natural gas from shale deposits while Russia was undermining OPEC’s role by exporting oil at a lower price.
 
Starting from 2014, Saudi Arabia in particular, and other OPEC nations decided that the only way to regain their position was to starve upcoming mining companies in the US by driving down prices. Cost of production comes to about $50 per barrel in the US, mining and transportation, compared to less than $15 in Saudi Arabia and more than $20 in Russia. To starve any competition, prices had to drop below $30, and this is what they did – oversupply.
 
From the chart above, you can see the steady downtrend in the value of Brent crude oil throughout 2015. Reports by the International Energy Agency (IEA) such as the one on the 26^th of November reported a 3-billion-barrel surplus of oil in the world. This excess supply decreased the price of oil down to record lows of $27.50 on the 18^th of January 2016. By this time, many new oil-mining companies had filed for bankruptcy and even major companies like BP and Shell had written off a lot.
 
Before the decline of oil prices that started in late 2014, there was a boom in oil prices. This attracted many new companies who took loans to finance their businesses. With declining oil prices, many of these companies defaulted and filed for bankruptcy, causing the US economy to suffer. It was only until the ECB issued an economic stimulus package that the world economy got a boost, and oil prices began rising again. As the economy became more active, demand for oil increased, and so did the price.
 
Today, crude oil is trading at $53 per barrel, but the uptrend was not so smooth. Several OPEC meetings ended in disaster when Saudi Arabia would not agree to production cuts. Events like the Brexit poll also caused reduced demand for oil and its subsequent decline in price, but it always bounced back up to around the $51.50 level. After the OPEC meeting held on the 30^th of November 2016, production cuts looked imminent and oil prices finally broke through the $51.50 resistance level.
 
This year, oil prices will be determined by the upcoming OPEC meeting on the 25^th of May 2017 and whether the production cuts finally become a reality. Furthermore, Trump’s promise to recover the US shale industry may also reduce the demand for OPEC oil, which might resume the supply glut. There is a lot of uncertainty ahead, and we just have to wait and see what happens.