In the world of commodities, there are few that are talked about as often as oil; and it makes sense. Due to the overproduction of oil around the world, coupled with a lack of demand, the value of the commodities has fallen hard. While the value of oil has begun to stabilize, there's quite a bit of debate with regard to how high it will climb. Here are the arguments on both sides of the fence and what I think we'll see moving forward…
The Belief That Oil Is Going To Rise In Value
The belief that oil is going to continue to rise in value is fueled by a few facts. They include…
- Oil Rig Counts Are Continuing To Drop – In recent months, the amount of active oil rigs in the United States has fallen quite substantially. In the united states alone, on the week of April 17th, the oil rig count fell by 34 to 954 active rigs in the United States. The US isn't the only country experiencing this trend. Since less rigs means less production, this should eventually even out the oversupply issue.
- Most Drillers Are Scaling Back – In the oil mining industry, drillers automatically scale back spending when the value of oil is low; it's the only way for them to remain profitable. However, less spending plays a role in output; further reducing the production of oil around the world.
- Demand Is Rising – Taking advantage of low oil prices, consumers are finally starting to drive more. As a result, more oil is being used!
Keeping these three points in mind, and considering that the value of oil is driven by supply and demand, it only makes sense that the value of oil would continue to rise. However, there's a key point being missed in this argument.
The Belief That Oil Is Going To Stabilize Low
On the other end, there are a number of experts, including myself believe that oil will soon reach resistance in the market and start to stabilize at a low value; where it will most likely stay for at least a couple of years. Here's the argument on this side…
- We Are Still In A State Of Oversupply – While growth in the production of oil has slowed, it hasn't yet moved backward. We are still in a position where more oil is being produced than is being used. As a result, under the laws of supply and demand, prices simply can't get much higher.
- Storage Is Still At Dangerous Lows – While demand is starting to go higher for the commodity, we are still facing an issue of storage. In the United States and several other nations around the world, oil storage facilities are getting dangerously close to topped off. Until demand pulls oil out of storage and frees up more space, prices can't get much higher.
What We're Likely To See From Oil Moving Forward
Moving forward, I'm not expecting to see any major gains from oil. While we are moving in the right direction, coming back from a major oversupply crisis is going to take some time. So, we're likely to see oil stabilize well before the $70 per barrel mark. If it goes above that mark, get ready for another correction!