The unpredictable logic of oil prices 13/10/15

The price of a barrel of oil depends on many factors. It increases when supply is down, such as when there is an embargo on an oil-exporting country like Venezuela, and demand is up, such as when there is significant growth in emerging countries, like China and India, requiring more energy to power their production. Conversely, the price of a barrel of oil drops when supply increases, such as when new shale oil wells are discovered in the United States or when sanctions are lifted against Iran, which has considerable reserves at low operating costs, and when demand decreases, such as an economic crises affecting industrial countries.

We can add one more to these factors: the currency in which the oil price is set, the dollar. Depending on variations in the U.S. currency, which appreciates or depreciates relative to the euro, a barrel of oil costs more or less for users of the euro. These multiple factors are difficult to quantify and eagerly anticipated by markets. The sum of these speculations also contributes to the price of a barrel.

The price of a barrel of oil has become extremely volatile over the past forty years, due to the increased effect of globalisation, having gone from $140 in June 2008 to just $41 dollars just seven months later. It is nearly impossible to predict variations in the price of oil for market players of any size, who must adapt to these upheavals. Of course, TVA Group is no exception.

However, there are cycles that exist, whose length and magnitude are poorly understood. So, when the price of a barrel is low, wells with high operating costs are closed for being unprofitable. Nobody sells a barrel for less than their production costs. Oil supply then goes down, and prices go up. Conversely, when prices reach a higher level, wells with high operating costs once again become profitable, which results in a higher supply of oil and a downward trend in prices.