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What investors can expect from the current oil price decline

What investors can expect from the current oil price decline

Oil has been falling in price since the beginning of October and this trend continues. If in the first days of October Brent was over $ 85 per barrel, and WTI – was above $75, by mid-November they fell below $70 and $60 respectively. The overall decline on fears about oversupply amounted to more than 20%.

The decline is credited to the news about a significant increase in the number of drill rigs in the US: during the week of November 9, their number increased from 1067 to 1081. The United States is already at record levels of production and, it seems that the country intends to raise it further, putting even more pressure on prices. Will OPEC+ be able to reverse this trend?

OPEC reaction

As a result of Energy Ministers meeting of the expanded OPEC+ format, production is to be cut by about 1 million barrels per day. The only question is from what level because in recent months a sharp increase in production was observed in both Russia and Saudi Arabia. The latter even talked about the possibility of increasing production above 12 million barrels per day, regaining the top spot. But now the solution may be the opposite.

This is fundamentally different from the situation in 2014 when oil was much cheaper. Back then OPEC countries did not comply with quotas and maintained a high level of production, trying to strangle the shale revolution in the United States. Now the reduction seems quite real.

However, subsequent clarifications made it clear that the issue is far from resolved. It may take considerable time before the reduction is agreed upon. But OPEC is closely monitoring the dynamics of supply and demand. Even if we do not see a sharp rise in oil prices, OPEC+ promises can at least arrest the decline, while at the end of 2014 the cartel statements only strengthened it.

Short term rise in oil prices is favorable for the markets, medium term – not quite

Though it is customary in Russia to rejoice over high oil prices, the situation is different in many other regions of the world. The recent fall in oil prices and the extremely accommodating monetary policy of major Central banks (partly due to oil price fluctuations) have significantly accelerated economic growth in key regions. If oil prices rise again, it will spur inflation and force Central banks to raise rates, suppressing economic activity. Higher oil price, if sustained, could seriously hurt global economic growth in the medium term, although in the short term it could have a positive effect on markets by lowering volatility.

What this means for investors

Regardless of what exactly OPEC+ does, the expectation of oil price rise in itself can, at least temporarily, reverse the trend in the coming days. It is likely that at present oil prices are near the bottom and it may be an opportune time to invest in "black gold". This can be done both directly (NYMEX exchange) and indirectly through oil funds such as USO (NYSE Arca exchange).

This tesxt is for informational purposes only and should not be regarded as an offer or solicitation of an offer to buy or sell any investments or related services that may be referenced here.

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