Oil is Up | Will Gains Continue?

Following long term downtrends in the value of oil, we’re finally starting to see relatively bullish activity out of the commodity. Now, the big question being asked is whether or not gains in the commodity will continue. In my opinion, the answer is no! Today, we’ll talk about why I don’t believe gains in the value of oil are likely to continue.

Why Oil Has Been Down For So Long

Before we get into why I don’t think gains are going to continue for very long, it’s important that you understand what the oil crisis is all about and why it has lasted so long. Oil, like most commodities is at the mercy of supply and demand. When supply is low and demand is high, we tend to see gains in the value of the commodity. Adversely, when supply is high and demand is low, we tend to see declines. So, the oil crisis is really all about supply and demand. Here are the factors associated with supply and demand that are causing a continuation in the crisis…

  • Global Economic Conditions – In the United States, the economic conditions look pretty steady. However, when looking outside of the United States, a new picture starts to emerge. Unfortunately, some of the largest economies around the globe are struggling. This includes China, Europe, Japan, and several others. When economic conditions are poor, consumers look for ways to save money, and one of the best ways to do so is to reduce reliance on oil. As a result, demand for oil has fallen.
  • Climbing Supply – Generally, when demand for oil is low, the countries that produce oil start to slow production to keep an even balance on supply and demand and support the price of the commodity. However, that’s not what’s happening this time. In fact, every time we turn around, the world seems to be producing more and more oil as each country continues to vie for a larger market share in the industry.

As a result of the two primary issues above, we’ve reached a global supply glut, forcing the value of oil downward.

Why Gains Aren’t Likely To Continue

Today, we’re starting to see gains in the value of oil as market conditions around the world start to improve. So, many are asking whether or not gains are here to stay. In my opinion, the answer is no, and for good reason. The reality is that market strength is likely to be short term. Investors are reacting to the massive losses we’ve seen in the market, causing values to climb. However, stocks can’t go up much higher, and neither can oil.

The bottom line is that oil is still facing the same problems that caused the crisis in the first place. While market conditions seem to be improving for the time being, global economic conditions are still in shambles. In fact, hopes of stimulus out of China and Europe are what’s causing the improvements in the market and therefore, in oil today. However, even with stimulus, it’s going to take quite a bit of time for either one of these economies to improve. After all, China reduced its interest rate 6 times last year and Europe reduced its interest rate and extended quantitative easing in December. Neither one of these actions has caused positivity in either economy as of yet. The reality here is that it took a long time for economies to spiral out of control and oil supplies to reach crisis points, and it’s going to take quite some time for any solution to the problem to be effective.

What Do You Think?

Where do you think oil is headed moving forward? Let us know your opinion in the comments below!

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