This week, the price of oil reached $90 per barrel. It’s the highest level since November 2022.
What should you make of it?
Is it a one-time event, or are we at the beginning of a bull market?
Here at the Financial Star, we discuss megatrends. Most of them have to do with emergent technologies, such as artificial intelligence, or systemic shifts in the global energy markets, such as the clean transition.
But within larger trends, sometimes there are bull markets in other commodities and assets that we do not want to ignore. After all, our job here is to serve you with a selection of trends and patterns that could potentially help you become a better investor.
So, what’s going on with oil?
Why Did Oil Hit $90?
When it comes to oil, a handful of countries dictate where the market will go next.
The Organization of the Petroleum Exporting Countries (or OPEC) has a tight grip on the oil market. Russia, one of the major oil producers, is part of a larger group called OPEC+.
And this week, Saudi Arabia and Russia announced that they would extend their production cuts. In effect, these two countries said that they would limit their contributions to the global oil supply longer than expected.
Lower supply supports prices or sends them higher. So, Saudi Arabia and Russia’s decision did exactly that.
The Saudi Ministry of Energy said that the one-million bpd cut will be extended until the end of December. Originally, it was scheduled to end this month.
Russia’s decision to take about 300,000 bpd from the market has the same schedule. Right now, it will run until the end of December, too.
This amount of lost supply produced the spike.
Now, what happens next?
Is Oil in a Bull Market?
The long-term outlook for oil is still negative.
The world is moving away from fossil fuels. Even countries like China, which consumes the most energy in the world, and coal in particular, have been making rapid progress towards decarbonization. China is the world’s largest emitter of carbon dioxide (a greenhouse gas), and it wants to change that.
The European Union and the United States have dedicated hundreds of billions of dollars toward the same goal.
So the trend is clear. And the “green transition” is a megatrend.
But in the short to medium term, the world will still need oil and gas. That’s just the reality.
To make an investment case for oil, however, you need to be able to time the decisions of some of the most inscrutable governments in the world. They are the biggest actors in this market.
Timing these decisions is probably impossible.
And that’s the problem. As an investor, you don’t want to wake up one day to a piece of news saying that the supply shortage engineered by OPEC+ was made less significant by other countries willing to produce more, even if it means selling the oil at lower prices.
The oil market is competitive, and not every oil producer is on board with the decision-making of the OPEC+ cartel.
As a result, we can’t confidently say that we see a megatrend in the making. Or even a bull market.
For your peace of mind (and potentially for bigger returns), we suggest looking elsewhere.
Thank you for your loyal readership,
The Financial Star team