prices go back up. Higher prices make it economical for producers to drill more oil again… and the cycle continues. The third driver of oil prices is the U.S. dollar . Oil worldwide is priced in U.S. dollars. If the dollar is high, the cost of oil per barrel is “cheaper” and the buyer can spend less of its resources on oil. But if the dollar is low, the cost of a barrel is “expensive,” and the buyer must spend more of its resources on the oil it needs. The fourth driver of oil prices is war and instability . You only need to look at the oil price shocks over the past 200 years to see that conflicts, especially in the Middle East, drive oil prices up. A threat to supply makes crude buyers pay more for the oil they need. Inventories, strategic petroleum reserves, and weather also all impact oil prices . But most of these are short-term indicators, both up and down, and have little to do with long-term oil prices. Finally, speculation in oil and oil products has become a driver of oil prices . Commodity index funds that invest in a basket of crude oil and refined products have pushed prices higher and lower than they otherwise would be based only on supply and demand fundamentals. Speculation moves physical oil away from the normal business channels and can impact prices as “artificial” demand or supply is created. Where Are We Now? In 2017, we are nearing the beginning of a new boom cycle in the oil markets. Oil prices are rebounding from their 2016 lows. Demand is high. And, as we’ve discussed, they will only go higher as China and India industrialize. And supply – while still enjoying a boost from revolutionary drilling technologies like horizontal drilling – could fall or remain steady in the coming years while demand grows…
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