The value of oil rallied last week as investors took an excited stance with regard to the outlook of the commodity. However, that bullish opinion started to turn directions today as the value of oil fell dramatically. Today, we’ll talk about why the value of oil rallied last week, why we started to see declines this week, what we can expect moving forward and how you can take advantage of the trends. So, let’s get right to it.
Why The Value Of Oil Started To Rise
To understand the reason that the value of oil started to rise, it’s important that you understand why it fell in the first place. The reason oil fell in the first place has quite a bit to do with the law of supply and demand. When a commodity is oversupplied and demand can’t keep up, we tend to see declines in the value of that commodity. That’s exactly what happened to the price of oil. With climbing production around the world, the oil industry was producing 2 million barrels more per day than the world was using. As a result, a massive supply glut hit the market; causing declines in the value of the commodity. However, last week, signs that supplies are slowing down caused the value of oil to start rising again. First off, the US oil rig count came in lower than it was expected to and the EIA stated that the United States produced 120,000 barrels less per day than it normally does in the month of September. Another factor pushing the price of oil higher was the fact that OPEC announced that it would like to see OPEC members and non-members work together to solve the supply glut issue. Between these two major pieces of news, investors got a glimmer of hope for declining production and increasing values.
Oil Settled Down 5.1% Today
While the value of oil rallied last week, this week is an entirely different story. In fact, the price of the commodity settled down 5.1% today, closing at $47.10 per barrel. The reason for the decline is simple. While United States production is down slightly, 120,000 barrels per day does nothing to solve a 2 million barrel per day problem. Although OPEC is pushing for a solution to the supply glut, that solution is believed to be far off. After all, even if the world stopped producing oil entirely right now, we still have a heavy supply of oil in storage and that supply is going to take time to burn through. So, investor excitement faded away as the real issues took the forefront of the oil market stage.
What We Can Expect To See Moving Forward
While I would like to see gains in the value of oil, I have to say that I don’t think that we’ll see any long term gains for quite some time. In fact, I’m expecting for the commodity to settle down even further; dropping to between $40 and $45 per barrel at the most. As mentioned above, even with the US decline in production and the thought that OPEC is working to solve the supply glut, the world is still over supplied; and that’s going to create more issues moving forward!
How To Take Advantage Of The Trends
For now, and at least the next several months, oil is likely to continue declining. With that said, now is the time to look for put option opportunities on oil. What you’ll want to do is is follow trend lines. When the value of oil nears the resistance trend, purchase put options to follow the declines down to profits.
What Do You Think?
Where do you think the value of oil is headed? Let us know in the comments below!
[Image Courtesy of Energy 4 Me]