Oil Price Volatility | Russell T. Rudy Energy LLC
No one knows for sure what future oil prices will be. However, according to an article in “Oil Voice” by Paul Hodges, we know they will be volatile. The article contains a graph showing how volatility, as measured by percentage increases/decreases in prices, has spiked in response to the Gulf War, 9/11, and the subprime crash. The recent Brexit vote has caused a market response similar to 9/11. However, unlike previous spikes, there have been no invasions of oil producing countries and no terror incidents of the magnitude of the Twin Towers. It should be noted that when prices are relatively low, any fluctuation seems more volatile when considered as a percentage of price.
Hodges thinks that the Brexit vote, in and of itself, did not affect oil prices. He doesn’t even think that supply and demand were the main determinants of oil prices in the first half of 2016. Rather, he thinks that the price recovery in January was based on two myths: falling rig counts would reduce production drastically, and OPEC and Russia would agree to freeze output. Lower rig counts did ultimately result in lower domestic production, but not nearly as quickly, nor as dramatically, as expected. Operators became more efficient, thereby delaying and mitigating decreases in output. Russia and OPEC did not agree to freeze production. Even if they had, it would have merely perpetuated a global surplus.
The author thinks that when the U. S. Federal Reserve backed off on its decision to raise interest rates, financial players sold dollars and bought commodities. This had two positive effects on oil prices. Selling dollars meant it was worth less and consequently, it would take more dollars to buy a barrel of oil, sending the price upwards. Secondly, the flight to commodities included large purchases of oil which drove up demand and price. With the Brexit, Hodges sees the opposite happening as investors fled from other currencies for the dollar as a relatively safe haven. This pushed the value of the dollar up and oil prices down again.
Hodges then deals with the illusion of growing Chinese demand and cautions that current prices might well be inflated and subject to longer term erosion.
To read the article in its entirety, please go to http://www.oilvoice.com/n/Oil-price-volatility-highlights-uncertainty-ahead/89ed6cecd5c1.aspx .
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