The drop in the crude oil price has brought many analysts to ask why there is a rebound in oil prices. One might be inclined to ask the same question about a rise in the stock market, which also undergoes the same decline after the news of economic trouble makes the headlines.
But one must be cautious to interpret that one cannot use the fundamentals for profit, as the last thing you want is to make a fool of yourself by relying on too much that is visible in the economy. The former does not dictate the latter. You can say that a recovery in the economy is inevitable after the recent downturn, especially when the world markets were closing down.
Let us be real and answer the question as it is asked by many traders and investors in the market. Why is the crude oil price climbing off the lows and recovery in the market a very possible scenario?
If you compare crude oil prices in the past decades, you will note that the price per barrel has dropped considerably even as the cost of production of oil has gone up. As a result, the flow of revenue from the cost of production has also increased significantly. As the cost of production of oil went up there were more demand and hence higher prices.
As an example, compare the three years before, during and after the most recent global recession which was initiated by the bursting of the US housing bubble; the International Petroleum Market, or the IPC for short, saw a spike in the prices of crude oil and other petroleum products and in the international petroleum market. This in turn forced producers to cut back on their supply and this caused a significant decrease in the prices of crude oil in the market.
The supply of crude oil was subsequently replenished and the prices remained relatively low or even dipped slightly. This led to a new rise in the price of crude oil as the supply was once again brought back to normal and the supply was replenished and the prices rose dramatically. This is the reason why we should not be surprised if the same scenario goes on to repeat itself.
This time, however, the supply is not going to be replenished to a point where there is enough demand to keep the prices high. The International Petroleum Market was actually created due to the lack of demand and that is the problem with an unsustainable economy. Hence, if a rebound is to take place then the supply of crude oil must be replenished.
The next question, as the question “why is the crude oil price climbing off the lows and recovery in the market a very possible scenario” implies, is the timing of the turnaround of oil prices. Is the rally possible because the economy is in need of a push or because the markets are anticipating a top in the prices of crude oil and other petroleum products?
A bottom may have been reached in the prices of crude oil as much as three months ago as a result of the shale oil and unconventional oil deposits discovered and exploited around the world. It is this very discovery that has forced the government to ease the fiscal policy to facilitate investment in this industry and the long-term planning that will allow for the emergence of a robust crude oil industry.
The drilling companies have been waiting for this for some time now and thus we are expected to witness a huge increase in the prices of crude oil during the first quarter of this year. After this big rebound in the prices of crude oil, the economies of the big and small nations alike are expected to experience a renewed boom.
Recovery from the recession will be difficult and delayed for many people who rely on paychecks from the oil industry. If the economy of the United States experiences a rebound then a rebound in the prices of crude oil will follow as the global demand is projected to shoot up to such a level that the supply will not be replenished to meet the demand.
The rebound in the prices of crude oil and a consequent rebound in the economy is anticipated to happen during the first quarter of 2020. The full effect of this will not be felt until the second quarter of 2020 as the world will reach the bottom of the global recession.