Oil prices will (and should) increase in the future. If you ask any media specialist, journalist, or a first year analyst will tell you otherwise. I beg to differ, and I think there is room for oil prices to go up, but not to the $100/barrel.
Reasons Why Oil Prices Should Increase
American drilling and the effect on prices
America’s drilling will decrease substantially (and it is already), and probably stop for a limited period of time because of the pressure on prices and decreased profit margins. While this is true, the world is in need of oil, and somewhere in the world drilling should take place, and this is where Middle East will continue drilling, and possibly increase their drilling operations. This shift in market share of drilling will increase OPEC’s power in setting the prices.
China, and it’s increasing energy demand
Media has been avoiding China and it’s increasing energy demand, and particularly, its increase in fossil fuel consumption. China’s fossil fuel consumption as % of total energy consumption has been increasing since 1999-2000, and according to World Bank, China’s fossil fuel consumption was 88.2% of total energy in 2005-2009.
In 2013, China surpassed the United States as the largest net importer of petroleum, accounting to 6.1 million barrels per day, according to the US Department of Energy.
Also, according to ExxonMobile energy outlook, China’s forecasted energy demand for 2025 is said to increase by 55%, while China set a cap on coal usage as an energy source, data does not show any caps set on petroleum usage.
Libya’s political turmoil
Libya is a significant oil producer, and accounts for large share in the daily production of petroleum. However, the country is undergoing a serious political turmoil since it’s shift in 2011, and it’s getting active in violence again since May this year. What this means is a decrease in production of oil (by force), and thus it will put an upward pressure on the price of oil because of limited supply.
Market frenzy and short selling
There is a tremendous amount of short selling on crude futures, which puts a short-lived downward pressure on oil based on market frenzy and investor fears. History has shown that fear and frenzy lives for a short period of time, and fades away once investors realize the extent of the problem. Need a refresher? Look back at 2008 and see how the market reacted, and was being said, and how does the market look today.
The $0.02 on oil prices
I’m not bullish on $100 / barrel prices, but I’m not bearish either on $30 / barrel. I think there is a middle ground that the prices will stop at and play around. That could be $70/barrel, who knows?
The alarming situation in Iran
Despite the reasons mentioned, the situation in Iran is indeed alarming to the price of oil. The main reason is the press conference held with Iran’s oil minister indicating that they are able to supply the international markets with 500,000 barrels a day within one week of releasing the sanctions, and a whopping 1,000,000 barrels / day within a month. Referring back to the history or Iran’s oil production, we will see that they are able to supply the market with an average 3.6 million barrels a day, according to Bloomberg Business. If OPEC’s decision to resist accommodating Iran remains still, then the prices would indeed go down. Otherwise, there shouldn’t be much of a difference if Iran’s production is included in OPEC’s quota, and the above reasons will most probably be sufficient to stabilize prices in the near future.