Long-Term Price Action for Crude Petroleum is Set
One of the many unique things about the international crude oil market is that traders use futures rather than other kinds of instruments. Unlike gold, stock shares, bonds, exchange-traded funds (ETFs), and dozens of other types of investments, the single most accurate way to measure the ups and downs in this unusual commodity niche is to watch what happens with futures contracts. Are prices rising, falling, moving sideways, or experiencing volatility? Answer those questions and you’re likely to have a firmer grasp on what’s going on with black gold, aka crude petroleum.
Another way to gain insight is to keep a close eye on oil contract dates and what happens to their value just before expiration, which happens on the third Friday of each month. Often, a single political event, natural disaster, or economic headline can cause significant turmoil in the entire energy sector. That’s one reason active futures traders in the petroleum sector follow all the news about OPEC, global hot spots, hurricanes, earthquakes, presidential elections, and other important developments. What has been happening recently that has the potential to affect per-barrel prices in this tricky investment class? Here’s a rundown of the current state of affairs that should bring a bit of clarity for anyone who has a vested interest in crude petroleum prices.
Demand Will Remain Depressed for the Short-Term
The COVID pandemic is not over, as several developing nations have officially announced that they continue to have trouble minimizing the spread of coronavirus. As proof, a recent OPEC announcement mentioned India as being particularly hard hit by the virus and one of the nations in which demand for crude is still unseasonably low. That’s no surprise, as millions of small and large businesses remain shuttered, personal vehicle use is way down, and all sorts of energy-dependent activity have slowed to historically low levels.
The latest OPEC prediction for worldwide oil demand notes that daily consumption of crude will likely be down by as much as 400,000 barrels through the end of 2021. The cartel’s ministers pointed out that two key factors played into their estimates: rising COVID infection rates and the lack of a viable vaccine as of late 2020.
When Recovery Comes, It Will Be Slow
Even the rosiest of scenarios include the word gradual as a way of damping down expectations. Outside China and Europe, many of the world’s most economically developed nations have run into obstacles when it comes to stifling the spread of COVID. Even where efforts have begun to pay off, the return to normalcy has been slow. For example, demand for gasoline and airplane fuel has started to rise in the U.S., Canada, and South America. However, even if that positive situation continues, demand won’t be back to normal for at least two years.
What Happens After the Peak?
What does that mean for the dollar value of futures contracts between now and the end of 2025? Based on what OPEC and other major producers are seeing in terms of worldwide demand trends, the most probable scenario is a gradual rise in price until a peak is reached. After that, a flatlining effect could set in for several years as many decide to cut back on their energy consumption, drive less, work from home, take fewer vacations, and generally wean themselves from petroleum.
Renewable Energy Will Be a Game-Changer
Already, renewable energy has played a major role in the attitude of the oil cartels and other producers in developed nations. The slow but sure uptrend in the use of renewable sources, particularly battery-powered vehicles and solar, has not gone unnoticed by those in power. Many of the largest petroleum corporations and refiners have been investing heavily in non-fossil fuels.
Long-term trends, namely those affecting what happens between now and 2050, point to a historic turnaround in the way people live, travel, work, and operate their businesses. Once the COVID pandemic is fully behind us, the price of crude will no doubt rise. The question is how far up will they go, and what will happen after that. The odds are on the side of an upswing and then a flattening worldwide petroleum price.
Whether the flatline will begin in this decade or the next one is not clear. What is clear is that there will be a long, gradual decline in global consumption patterns for petroleum. Ironically, all the concern and panicky headlines about the world running out of oil were probably as wrong as they could be. As of late 2020, the biggest problem in the energy market is too much petroleum, not scarcity.
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