Crude oil is still at the heart of economic turbulence in the U.S. and the rest of the world. And despite the fact that OPEC countries seem to be coming to terms with the struggles that they are facing, and causing, in some cases, not everything is what it seems to be. To get a better understanding of the potential in this economic warfare, looking at the politics and the economic impact behind everything is a must.
First, let’s start out with what’s happening in the United States. The U.S. does produce oil, and they do have reserves, but because of increased consumption, the domestic oil production is not keeping up with demand. This means that reserves are being depleted, and that means that there is a possibility that the U.S. could run out of oil. It’s not likely, but if things do not change when it comes to consumption in the coming years, it could happen. This would once again give OPEC nations the upper hand, and their ability to manipulate prices would once again drive the price of crude up. Again, it’s not something that will happen in the near future, but it is in the back of everyone in the oil industry’s minds. It should also be something that traders are aware of as oil is currently the cause of much of the volatility going on. If oil were to stabilize and start becoming consistently more expensive today, it would have an immediate impact on every single portion of the market.
We are also seeing that OPEC’s strategies are beginning to work. Saudi Arabia has been at the forefront of this, by pumping out huge amounts of oil on a daily basis. Yes, it has hurt countries over the short term, but if you look at a long term strategy, it makes sense. By flooding the economy with cheap oil, alternative sources of oil are being hurt because they are not able to charge the same amount with the same amount of profitability. Look at what happened in Russia. Russia is a huge exporter of oil, but they have seen huge economic declines because oil is now too cheap for them to maintain the levels of income that they were once seeing. The same is starting to happen in Norway. The Varg oil deposit has been shut down in the North Sea area because cheap oil is not helping to make the venture profitable. It’s hurt the companies involved enough that they have decided it’s not worth pumping there anymore. In short, flooding the world with cheap oil for a very long period of time is destroying competition. In this sense, it’s a brilliant move by OPEC because it reduces future competition. Oil prices have been devastated for a few years, only to see them skyrocket in ten years. If it works, the survivors will become even more wealthy than they are now.
Traders should be looking at this, but how they should act is not immediately clear. For example, binary options brokers do not allow you to take out positions that are long enough in timeframe that you can use this method to profit from the price of oil. These go out as far as a year, and one more years isn’t nearly enough time to thrive off of this move. Even traditional futures don’t go out far enough. You might find a futures contract for five years if you look long and hard, but even that’s not long enough to guarantee anything. Instead, you should just be aware of the potential for what’s going on and act accordingly and be cautious with your positions.