Is there any opportunity in trading oil for the months ahead?
A guide to looking at the best potential returns you can gain from the oil market, and what the long-term investors are advising for when it comes to evaluating crude oil shares.
An analysis of oil so far…
The trend of falling oil prices from the previous year hit an all-time low last February, which saw the barrel plunge to $26.
However, the rebound soon followed when traders were lured back in by the very low investment opportunity.
Even though the upward trend has slowed over previous weeks, it’s still not too late for marking a strategy for crude – as many investors have made many prosperous returns in this venture.
See Charts here:
Although the graph has a steep sliding trend, since the 2015 point, many experts have speculated that prices will neither rise or drop excessively in the months ahead, and will instead steadily flow sideways (a small hike or fall here and there, but nothing major).
Why is a sideways oil move likely?
Many economists have agreed that the previous volatile behavior in prices, has now settled, and is accurately in line with the current demand/supply circumstance. So with not much leverage for it to move enormously, it will remain stable until something changes spectacularly with either market demand or supply.
When Canada’s oil fields suffered from wildfires causing issues to supply, then this caused volatility in price per barrel.
See charts here
You can see from the beginning of May that the price spiking up to near $50 per barrel, which was caused by the supply outage (and also there were other production halts from war nations like Libya and Nigeria).
Outages are only temporary most of the time, with volatility only lasting for short periods.
What about demand?
Since 2014, there has been a flooding of oil into the global market, for the following reasons:
- Saudi Arabia and the Middle East nations have been pumping oil into the market, even though prices have been falling – nations have called for them to halt production, but have ignored the requests and carried on.
- The USA’s new industry in gas and shale has grown enormous, putting the nation as the highest oil producer in the world.
- China and Russia have also joined the shale gas revolution.
With so much crude oil available, this has exceeded market demand and caused prices to plummet. Ultimately, oil companies have had to make cutbacks and redundancies.
The fear back in January 2016
Many feared of crude oil falling below the $20 mark, however, the supply outages and normalization of the market has now currently kept prices stable at around $46 – $49.
What we need to look out for this year
Any unexpected challenges that may disrupt either demand or supply in oil, which may cause volatility.
US Shale Producers and Opec are still aggressively pumping a lot of oil into the market, so this is an issue for oil investors to keep their eyes on – especially for this third quarter.
They usually have an influence on the way markets go, so the odd headline may also cause an unbalanced level, however, the median will remain tight in comparison to what it was over the last few months.
So investors taking short positions will experience better performance in returns, in comparison to those holding shares for three or four months.
How to profit from Crude Oil
Firstly, you need to understand both ends of the market – large vs small. Small will be more volatile than big.
Example of large vs small
If you compare gold to silver (gold being the larger one), silver has much higher price fluctuation than gold does.
So for shorter play, silver can have far better rewards.
Taking this back to oil, it would be large vs small oil companies. Smaller companies are always going to be more volatile in a sideways trend, unlike the big competitors – for the following reasons:
- A smaller company is more vulnerable to economic conditions.
- Local influence has more leverage on a smaller business.
- A small firm has much higher risk.
If you are planning to get in and out quick, then these firms definitely have a lot of potentials.
What to look out for
They do have far more volatility, but as mentioned above, they do also have a higher risk too – so always have a get out stop in place, to prevent a huge loss of money.
As the share prices of small business’ will fluctuate in a larger range, you will have the chance to buy at a far lower price and sell at a higher rate.
Opportunities like this simply don’t manifest in the same way with the large companies.
This doesn’t mean that you can’t make money with large companies, but as the risk is on a similar level, then it’s more beneficial to invest in a small company that reaches higher returns along with accompanying the risk.
How to tackle long-term positions
The falling oil prices would have been the perfect time to invest for a bargain price, but the way markets are still futile anyway, then it would balance out over time anyway if you remain committed.
If you are a 3 – 4-month investor, then, unfortunately, this opportunity has sailed away – unless of course, if US Shale or OPEC, creates further supply than the speed of growth in demand (which is unlikely at the moment).
Here are some guidelines that should be taken into consideration, for whether you are making a quick or committed position:
If a company is being run well, then they should be making bigger returns than their competitors, especially in the short-haul.
Things that should be considered:
Their performance should show confidence in continued profit, for all the time that oil prices remain low. Also, they must have steady margins, low debt, and high cash flow (also important indicators for long-term investment too).
Recommended Long-term investment oil companies
The following shows the best oil producers for the committed investor.
|NYSE: OXY||$74.83 USD|
|NYSE: EOG||$79.71 USD|
|NYSE: APA||$54.58 USD|
They produce oil at low costs, unlike the majority of their competitors.
What’s the outlook for oil in the future?
Many economic forecasters expect oil to continue trading sideways for now, but it will always be extremely volatile for any changes to demand or supply.
At this moment, an oversupply can become an issue again, especially with OPEC increasing their production, and not to mention the levels recently recovered from Canada, Nigeria, Libya and Iraq.
Another risk to oil
The increasing demand for clean alternative energy, in recent years, have seen a surge in new energy innovations (wind farms and solar panels).
Traders need to be knowledgeable of oil price fluctuations under this current climate, whilst only looking to hold on for a day (or two at a push).
The excitement from the last big bounce has run its course, though, and is now a missed opportunity – it would be much too risky to invest and keep this quarter.
But looking on the bright side, there’s always gold – the current safe haven from low-interest rates, uncertainty in the financial, commodities and stock markets.
If you do plan to be in and out with your investment, then smaller companies will be your better option.