What Actually Drives the Price of Oil

What Actually Drives the Price of Oil

SummarySupply is currently higher than demand by an estimated two million barrels per day according to the Energy Information Administration.Cross-market context is equally key. Watch the futures curve and options market.On April 17, 2016, key oil producing countries will be meeting in Qatar to “follow-up” on production freeze talks.Commodities are often associated with purely speculative investments. This is simply not the case. Just like a stock, commodities have fundamental drivers too.The price of oil has become increasingly more important since it began to tumble back in June of 2014. When the market started to trend with oil, interest in black gold surged even more. With renewed interest in oil, it’s essential to look at what the professionals consider when analyzing a trade.The oil market can be broken down into data points that derive from the price of oil, futures contracts, production, demand, and a variety of other factors. Looking into these factors will bring context to your oil investment.The Fundamentals of OilFundamental analysis normally starts with earnings or revenues. Traditional investable assets like real estate, bonds, and equities generate cash flow for investors—making valuation and fundamental work easier. Commodities like oil, on the other hand, don’t have cash flow—making them a pure price play. Accordingly, it’s essential to step back and observe the oil market from a macro point of view in order to grasp the current fundamental backdrop. This boils down to supply and demand dynamics.According to data from the Energy Information Administration (EIA), there is a tremendous daily glut of oil hitting the market. As the chart below displays, there are two million barrels per day right...