Oil Prices Weaken: Short-Term Benefit or Long-Term Goal?

Oil Prices Weaken: Short-Term Benefit or Long-Term Goal?

Oil Prices Weaken

Short-Term Benefit or Long-Term Goal?

Historically, the oil market has been characterised by that of a bullish trend, however, in more recent times, oil has adhered to that of a bearish trend. With the price of oil falling more than 20 percent on Wednesday, crude oil futures in the United States closed at $51.68 a barrel, down 3.4 percent for the day, despite markets performing reasonably well on the day.

The decline in prices suggest that the demand for oil is weaker than expected as the global economy slows, with investors showing concerns that the price will go down further. Investors are also concerned that President Trump’s tendency to impose tariffs on imports from Mexico and the levy trade wars will hinder the growth of the economy and oil prices will facilitate the aforementioned bearish trend.

Suffice to note that the outlook for oil prices have been heavily revised. Analysts have held a more positive sentiment on the market and predicted that the oil price will jump to $90 a barrel and potentially higher due to Trump’s tightening of sanctions on two leading producers, Iran and Venezuela. Intuitively, the source of will become scarce and ultimately push the oil price.

The decline in crude oil prices is a telling indicator that growth in the global economy is slowing down. Given that oil prices have further implications on the economy such as its effect on other commodities such as copper, nickel and steel have also felt the impact of the decline. Neil Bradley, Chief Policy Officer for the U.S. Chamber of Commerce claimed that “as we assess the economy’s vulnerabilities, a fall in oil price is one of the things we’re looking at.”

While adhering to recent government reports, fuel inventories in the US are on the up, which indicates that the demand is weaker than expected. Cyclically, the supply of oil is often tight in the month of June and the price is high due to the seasonal demand. The supply of crude oil increased by nearly seven million barrels for the week, the highest level in two years.

The benchmark of oil fluctuated in the past year. The recent market condition is similar to that of 2014 and 2015, as the prices declined to $30 a barrel. Some analysts predict that the price of oil will respond in a similar fashion to last year after the Trump administration made it far more accessible for countries such as Japan and India to continue buying oil from Iran without running afoul of American sanctions. The Trump administration has since expressed that the sanctions against Iran will become stricter and do more to curb Venezuelan oil exports.

The tumbled prices has raised concerns about the domestic growth in the US and its rippling effect on the global economy. The softening global economy coupled with a strong U.S. dollar – which makes oil more expensive for other countries – could have further implications on the demand of oil. Additionally, with trade tensions escalating between the two major economies, it is highly likely that the aforementioned ripple effect will take its toll on highly dependable countries and commodities alike.  

David Malpass, World Bank Group President, noted that the “Current economic momentum remains weak, while heightened debt levels and subdued investment growth in developing economies are holding countries back from achieving their potential. It is urgent that countries make significant structural reforms that improve the business climate and attract investment. They also need to make debt management and transparency a high priority so that new debt adds to growth and investment.”

The drop of oil and gas prices will aid consumers, particularly those of lower-income households. Although most oil companies can still earn money at the current price level, in terms of looking forward, the nature of lowered oil prices is not sustainable, as the drop in prices will ultimately facilitate loss.

In essence, with trade tensions mounting and oil prices falling, the economy currently is in a predicament wherein short-term benefits seem far more attractive than long-term goals. Suffice to note that commodities and industries have sustained losses due to the volatility in prices. Given that the nature of economic has historically led recession in business, companies sales revenue will decline, unemployment rate increase, it’ll be interesting to see how the economy reacts to the fall in price.

By Chang Liu

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