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The Crude Oil Rally


Published on: 10/06/2016



The market for crude oil never fails to surprise. Last year we discussed the sudden drop of oil prices with its causes and implications, but lately it seems a new chapter is about to begin. Since February 2016 oil prices have recovered and are now in the vicinity of $50 per barrel – almost twice what they were worth just a few months ago. While this appears to be good news for those in the oil business, there are solid reasons why traders should be wary.

For one thing, something similar happened in 2015. Oil prices spiked briefly, giving oil companies hope that the downward trend of the price of oil has come to an end. However, they jumped the gun and in their attempt to get their product back on the market and reap profit at higher prices, they exacerbated the oversupply issue, causing the oil to drop back down to $26 a barrel.

Many major oil companies and oil analysts have stated that if the prices crawl up to $50-60 per barrel, players will try to get back in the game. Now that we are seeing prices close to this range many of the companies that cut down on production since 2015 are beginning to reconsider. Firms such as Occidental Petroleum (OXY), Pioneer Natural Resources (PXD), and RSP Permian (RSPP) are among those preparing to start drilling for more and increase production.

The problem, therefore, lies in subtlety. Oil producers have learned to some extent from their previous mistakes and know that an increase in production may cause a new drop in the prices. This is why most companies claim the increase would happen at a slower, better calculated pace. Nevertheless, the financial markets are a tricky place. Once the profit starts coming in, who knows what would happen; it is entirely possible that in some cases greed may take over reason. Even if there are some prudent companies, if the rest are not careful they may endanger the entire industry.

That is the situation in the US. Meanwhile, Iraq is producing more and more oil, which might also contribute to the possible worsening of the oil glut. However, the middle-eastern country doesn’t have much choice, as more than 90% of its revenue is the result of oil exports. Right now Iraq needs all the money it can find in order to improve nationwide security and defend against ISIS whose attacks have been getting worse in the past few weeks.

SuperForex recommends caution when dealing with oil. Stay ahead of events with our Analytics where we regularly post important trading updates.


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