What a $50 a Barrel Oil Price Really Mean

What a $50 a Barrel Oil Price Really Mean
June 1, 2016 Market Traders Institute

Turn on the TV, read the right websites or watch the markets and you will surely see some kind of story about the price of oil.  It goes up and down like a lot of stocks or commodities, but it seems like so much more attention is being given to it lately.  Right now, oil is hovering around $50 a barrel.  There are a lot of reasons for this. However, for as volatile as oil looks, it seems like this price point is here to stay for a while.

But what does a $50 oil barrel mean?  Sure it means lower gas prices (which we all enjoy) but it also has further reaching power that affects entire countries, industries and more.

This past Memorial Day weekend saw the lowest gas prices in 11 years, and this is after the summer rate hike and after oil rebounded from prices as low as $27 a barrel. What pushed oil to rebound?  It takes a few other factors from around the world…

It all begins with the Organization of the Petroleum Exporting Countries (OPEC). The organization has been mostly silent when it comes to the oil market, but they have laid hints about their pleasure in seeing the market rebound.  Mostly, they are recognizing that oil demand has exceeded supply for enough years that the American market just got used to not using as much oil.  Now the supply has caught up.  A glut of oil has made it so supply and demand is becoming more or less equal, and oil prices are stabilizing as a result.

Unpredictable events also had an effect on the world oil production.

“”We’re seeing non-OPEC supply decline quite substantially and, add in the supply interruptions which are humungous and we’re seeing the surplus going down a million barrels a day in the second quarter already,” said Gary Ross, the founder, executive chairman and head of Global Oil at PIRA Energy Group. “Which is way earlier than most people expected.”

These “supply interruptions” included the wildfires in Canada, militants in Nigeria and the removal of almost 100,000 jobs in the oil industry.  All of these added up to a perfect storm which resulted in oil barrels pricing the lowest numbers in almost two decades.

Now that oil is back up, we can work to solve some of the problems these events caused.

A $50 a barrel oil demand shifts production and distribution of oil from the Middle-East and Africa back west.  The Canadian wildfires have subsided enough for them to start producing oil again.  The demand also brings back jobs to the industry.

Bob McNally, president of the Rapidan Group, told CNBC on Wednesday that if the oil price recovers to $55-$60 a barrel, U.S. shale oil production would be “ready to go.”

“I think if we see crude go back to the $55-$60 level we’re going to see rigs going back to work…and I think they’re confident that the bottom is really in this time. I think you’ll see rigs deploy and capital deploy and the real question is how quickly they can get labor back.”

Like any commodity, oil isn’t going to stay at $50 for weeks on end, it will bounce up and down by a bit, but if it can remain in the $40 – 60 range, then it can bring much needed stability to an increasingly volatile market.

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