Investing in oil can be a smart way of diversifying your portfolio. This is typically regarded as being a fairly volatile and complex type of commodity.
Let’s see what you need to know about it in order to understand whether the time is right to pump some money into this commodity.
We can get started by looking at how big this market is, and whether it has a good future.
A Look at the Global Oil Market
The International Energy Agency confirmed in late-2018 that over 100 million barrels of oil were bring pumped every day. Saudi Arabia, the US and Russia are among the countries that produce most oil.
Of course, demand levels for oil, petroleum and other associated is higher than ever before. The latest figures suggest that we consume virtually all of the liquid that is obtained around the planet each day.
The US Energy Information Administration confirmed in 2019 that the country consumes around 20 million barrels a day. Some sources suggest that China may now be consuming more than the US. So there is clearly a massive global demand that current production levels are barely meeting.
You may have seen scare stories about oil running out in the future. How much is left to be pumped? A report from BP called the 2019 Statistical Review of World Energy suggests that the planet still has 1.73 trillion barrels of oil that can be accessed using current technology.
This would be enough to satisfy global demand – at 2018 levels – for 50 years more. The countries with most reserves are Venezuela, Saudi Arabia and Canada.
The Price of Oil
If you want to invest in oil then you need to understand the current price, as well as some of the price history.
- At the time of writing, a barrel of oil is priced at just over $US50.
- The highest price in the last 52 weeks was $66.60.
- Its lowest point in that period was $49.31
As we can see, there has been a fair degree of volatility in the oil price in the last year. If we go back further, we see greater peaks and troughs. The highest that it has ever reached was in July of 2008. At this point, a barrel cost over $145.
Right now, the oil price is at a fairly low point when compared to historic prices. To understand what might happen next, we need to now take a look at the factors that influence the price.
Why Does the Price of Oil Change?
The reason why people tend to see oil as a volatile investment is the fact that so many factors affect its price. For instance, in recent days the outbreak of Coronavirus is credited with causing a fall, with reports of a solution causing it to side again. Political turmoil and conflicts are also reflected in the oil price.
If we go back to 2008 again, this was the year of the so-called energy crisis. Looking back at it now, it is generally accepted that prices fell so dramatically (from $147 to $32 in the second half of the year) because the recession caused demand to fall.
Some of the issues that cause price fluctuations are as follows.
- The law of supply and demand
- Emerging technologies that aid production
- The discovery of new reserves
With tensions rising in the Middle East and trade wars around the globe, why isn’t the price of oil now higher? Some analysts believe that higher production in the US and other countries has taken away the power of the OPEC block, causing an end to the boom and bust cycle seen in the past.
Is the Time Right to Buy?
If the prediction in the last paragraph is correct, oil prices will now be steadier. Demand appears solid around the world, but fears of a global recession need to be taken into account. This would most likely cause the price to drop.
There appears to be scope for oil prices to rise. However, with so many unknown factors to take into account, it remains as risky and excitement an investment as it has ever been.