Brief reminder about oil as an asset:
Before discussing the historical development of oil prices, it is important to remember how supply and demand for this asset actually operate. Indeed, we know that oil is considered a raw material widely used by the global industry, and that its production is spread over several countries such as Russia, Saudi Arabia and the United States. These are followed by the production of North Sea's Brent oil. Due to its scarcity, this type of oil has become more expensive than WTI, which is widely traded in the financial markets.
Regarding oil demand, it obviously comes from all regions of the world, although certain countries like China are very large consumers because of their strong industrial growth. Among the major importers and consumers we find the European Union, Japan and the United States.
From these data, specifically the ever-increasing demand, experts continue to argue that crude oil is expected to reach its production limit by 2050, posing serious problems as peak production is attained. It is therefore logical that prices follow an upward trend. Oil is indeed a non-renewable natural resource that is doomed to depletion because of large extraction volumes.
The phenomenon of oil shocks and their influence on the evolution of prices:
We often hear of oil shocks as moments prone to sudden surges in oil prices. Many of these shocks have indeed marked the history of the black gold, starting with those of 1973 and 1980, which led to a dramatic rise - three-fold- of oil prices in a few weeks. The barrel reached $ 40 in 1980, to oscillate between $ 15 and $ 35 between 1986 and 1999.
The Gulf War in 1991 led to a further price appreciation. From this period onwards, the price of oil been exclusively on the rise, with the 3rd oil shock of 2003 and peaking at $ 145 in 2008.
Recent variations in the oil price:
Over the last few years the oil price has experienced strong variations. This started in 2008 with a real shock to the oil sector that led to a major rise in the oil price that started in 2003 but accelerated with a major rise in demand from the emerging countries experiencing strong economic growth such as China and India. The global economic crisis of 2008 was the spark that ignited the explosion of the oil prices.
In just a few months, between January and July 2008, the oil price rose from 96 dollars per barrel for Brent oil to 144 dollars. But just after this rise the oil price experienced a major drop from 130 to 40 dollars between July and December of the same year. In response to this fall OPEC requested oil producing countries to reduce their production in order to maintain their revenue. This caused the price to stabilise around 80 dollars.
Around 2010, a recovery in economic growth and a significant rise in the demand for oil by the importing countries were significant influences in a new rise in the oil price. Also, the geopolitical problems that affected the Arab world in 2011 provoked worries relating to the production abilities of certain countries which caused a new major rise with the price per barrel of Brent attaining a peak of 128 dollars in March. In 2013, the price per barrel stabilised around 100 dollars.
In 2014 we can observe a new significant drop in the price of crude oil that fell below the 50 dollar threshold due notably to a high supply because of the rising production of shale gas in the United States and despite a continually rising demand. At the same time, OPEC, which generally reacts to this type of situation by limiting the production levels decided to maintain the production level, due to the influence of Saudi Arabia, and thereby compel the American shale gas producers to reduce their supply. Under the ensuing tension, the price per barrel of Brent oil fell sharply to 28 dollars at the beginning of 2016 which was its lowest level since 2003. Since then the price pursued a gradual rise until 2020 when the corona virus crisis struck. In fact, on 30 March 2020 the price of Brent oil experienced a significant drop to 22.37 U.S. dollars per barrel. This was at the beginning of the Covid-19 pandemic which, by paralysing the tourism, automobile and general industrial sectors, caused a rapid drop in the demand for oil. Following this, the price per barrel of oil temporarily experienced a negative price with sellers ready to pay buyers simply for accepting deliveries of oil that were taking up space so they wouldn’t have to continue paying storage fees.
More recently we have observed a slight recovery in the price of black gold that in January 2021 was hovering around US$56 per barrel.
Predicting the oil price using a technical analysis:
The main tool that enables you to make a forecast on the price of crude oil is of course the technical analysis, this is the analysis of the stock market charts in real time of the price per barrel of crude oil. These charts actually provide valuable indications on the movement possibilities of the oil price over the short, medium and long term.
For this you simply need to know how to interpret the different indicators that you can find on these charts such as the following:
- The trends: The trends are easy to identify and correspond to the rising or falling movements noted with the price. The stronger the trend the more likely it is to continue in terms of time, and vice verse.
- The volatility: This represents the strength of the current trend. The stronger the volatility, the more likely it is that the trend will continue.
- The technical support: A support level is the lowest level previously attained by the trend. If this level is passed by a drop in the price then the negative trend is confirmed and the price will normally continue to fall. If the support level is not passed then you may expect a reversal of the trend with a rise.
- The technical resistance: A technical resistance is the exact opposite of a support level. This is the highest level that the trend has previously reached. When this level is passed on a rise the rising trend should continue. In the case to the contrary this generally announces a reversal to a fall in the price.
To identify the current and forthcoming trends in the price of oil it is best that you know the most reliable technical indicators. To assist you we offer you here the opportunity to learn about the most popular indicators for black gold which will best enable you to correctly anticipate the future movements in the price per barrel of crude oil.
These three indicators are the moving averages, the MACD and the Bollinger Bands. It should be noted here that together these indicators are normally all available for free on the online brokers’ charts.
Identifying the oil price trend using the moving averages:
The moving averages can be used for short or long time periods according to your trading method. They in fact enable you to identify the trend over the short, medium and long term.
On the charts, a flattening or reversal of the mobile averages enables you to detect a change in the trend. You should also pay careful attention to the position of the spot price related to the moving or mobile average. The crossing of the moving averages is also a strong buy or sell signal. For example, a 50 day moving average that passes under a moving average of 20 days can be taken as a sell signal and a moving average of 50 days that passes above a 100 day moving average will normally indicate a buy signal.
Identifying the oil price trend using the MACD:
The MACD indicator, or Moving Average Convergence Divergence, enables the anticipation of a trend reversal in a more precise manner than the moving averages, notably as relating to short term movements.
On the stock market charts the MACD is represented by a signal line and the MACD line. When these two lines cross they indicate either a buying or selling signal, for example when the MACD line crosses and passes above the signal line this indicates a rising trend, and vice verse.
This type of indicator is one of the easiest to understand technically.
Identifying the oil price trend using Bollinger Bands:
Bollinger Bands are visually represented by three curves, one represents the moving average over 20 days and the two others that are above and below this curve represent certain differences.
This indicator enables the identification of the strength of the current trend. Therefore, a volatile oil price trend will display wider bands with a significant difference whereas when the trend is weak or unreliable we can observe narrower bands with a lesser difference.
When the oil price is closer to the lower curve this represents a strong buy signal and when it is closer to the upper curve this represents a significant sell signal.
Using this information it is therefore possible to identify both the direction and the strength of an oil trend.
Analysing the movements in the price per barrel using a fundamental analysis:
A comprehensive analysis of the movements in the price per barrel of crude oil includes of course a fundamental analysis which is accompanied by a technical analysis. The former is essentially based on a study of the announcements, events and publications that could exert an effect on the price of black gold. Here are a few specific examples of such factors:
- The value of the dollar on the Forex: As the price of crude oil is in fact quoted in U.S. Dollars, a weak dollar can favour buyers that use another currency as they will gain from the Forex rate differences and a strong dollar will normally do the opposite.
- The decisions made by OPEC and OPEC+: As we all know, the Organisation of Petrol Exporting Countries is responsible for the regulation of oil production around the world. The supply and availability of crude oil is, together with the demand, a major factor that will influence the price of this commodity on the market.
- Global economic health: As industry is the largest oil consumer it is clear that the state of the world economy will influence the demand for black gold and therefore changes in its price.
- Renewable energy and the environment: In the same way we would recommend you closely follow movements and changes in the environmental sector with the aim of favouring green energy over fossil fuels.
- Geopolitical conflicts: Finally, as we can see from historical information, wars and other conflicts that affect the producing or importing countries can exert a significant impact on the price per barrel of crude oil.