Oil Market Dynamics: What Influences the Price of Black Gold?

Oil prices fluctuate, reaching new heights and decreasing to new lows. On June 6th, oil prices rose by 2% after the European Central Bank decided to lower interest rates, sparking hopes that the Federal Reserve might follow suit.

After that, oil prices fell nearly 4% following Sunday's OPEC+ decision to begin phasing out supply cuts in the fourth quarter, despite concerns about demand and increasing production outside the group.

Brent Crude Oil Price
Source: Investing.com

Nevertheless, the chart above shows a falling trend for oil prices. Let's figure out what is behind oil's behavior in May-June and try to predict its future behavior.

The reasons for the recent fall
Oil prices fell last month for several reasons. First of all, oil production in the United States has reached 13.1 million barrels per day, and it is projected to increase to 13.4 million barrels by November 2024, which significantly increases the supply of oil on the market. Secondly, on May 1, a new pipeline was launched from Alberta to shipping ports in Canada. This pipeline increases oil supplies to the Canadian coastal zone to 1 million barrels per day, which also adds a significant amount of heavy oil to the global market.

In addition, non-OPEC countries increased their oil supply by 0.5 million barrels daily. At the same time, the OPEC cartel itself is planning to increase production, and the decrease in tensions in the Middle East raises the pressure on lower prices.

Finally, the growing popularity of electric vehicles also plays a role. Although this trend did not have a significant impact on prices in May, there is a sharp increase in the number of electric vehicles compared to last year, which leads to a decrease in gasoline and diesel consumption and, accordingly, puts additional pressure on oil prices.

What can we expect from the oil market in the near future?
With the peak season for vehicle use in the U.S. occurring from late July to August, the market can expect a slight movement in American oil prices within the $73-76 per barrel range.

A price drop to $70-73 per barrel will prompt oil purchases for strategic reserves, as evidenced by the actions of the U.S. administration. Conversely, an increase in oil prices above $80 per barrel will lead to more low-margin wells drilled in the U.S.

Globally, most countries have the capability to increase production, but only OPEC has a spare capacity of 3.5 million barrels per day, which can be activated within six months. The U.S. has over 4,500 DUC (drilled but uncompleted) wells, pipeline capacity reserves, fracking crews, and refining capacity reserves of approximately 5-8%.

Despite OPEC countries reducing production, current oil prices are lower than at the beginning of 2022. The oil market is oversupplied, and oil itself is increasingly a financial instrument. With production costs ranging from $5 to $15 per barrel depending on the country, the market price stands at $75-90 per barrel.

Instruments for Investing in oil
Long-term oil trading is influenced not only by geopolitical factors but also by weather and technological changes. The Federal Reserve's interest rate adjustments also cause price fluctuations and volatility. With an annual market value of $2.5 trillion, oil is undoubtedly an attractive and highly volatile instrument.

However, in my opinion, long-term oil trading is a highly risky operation, especially if it involves directional trading. Utilizing hedging strategies, calendar spreads, or inter-commodity spreads is much safer. Inter-commodity spreads, in particular, are fundamentally linked, such as gasoline-oil or oil-fuel-gasoline spreads, offering more stability.