The oil price conundrum has so many facets that analysts are unable to say with certainty whether $33 or $75 is the reality. The multiple factors that are having a continuing effect on oil prices vary in complexity and effect and are subject to rapid change on an ongoing basis.
The two realities influencing analyst forecasts are the fundamental and the technical factors that surround any asset and oil prices are no different.
The fundamentals are varied and complex and currently go much further than the usual data releases that essentially deal with production and demand levels.
The geopolitical factors that have been unleashed since the start of the Arab Spring, which has affected almost all the oil producers in Africa and Arabia, provide a part of the oil price saga.
Another element of the saga comes from the soft economic data coming out of China and the subsequent drop in demand for oil from the world's second largest oil consumer. The situation in China is further worsened by the latest data which shows that the economy appears to be contracting further.
Meanwhile, the continued strength of the U.S. dollar (USD), amid signs that the revival of the U.S. economy is on track, which, together with the expected rate hike later in the year, might not strengthen the greenback further, but it should maintain current values.
The number of active oil drilling rigs in the U.S. is also on the increase while an increase in shale oil production is in no small measure a key factor in the lower oil prices, according to Jeff Currie, global head of commodities research at Goldman Sachs.
On the geopolitical front, the disruption of oil production in producers such as Libya, Iraq and Syria is an ongoing event with rebel forces controlling production and selling oil at cheaper rates through third parties, thereby disrupting the normally orderly market process. Saudi Arabia is upping production for a variety of reasons including pushing prices down in order to effect the cost effectiveness of U.S. production as well as being a counter to the expected reentry of Iran as an oil producer.
The other fundamental factors are more related to the normal data releases which make supply and demand levels the governing factors influencing the oil price.
Goldman Sach’s analyst Jeff Currie calls it, “The New Oil Order”. That is, making sense of an industry’s transformation is a complex matter which has significant implications for energy importers and exporters, as well as companies grappling with changing energy prices.
As far as technical analysis is concerned, based on oil’s current trading pattern, if we look at the medium as well as the long term perspective, the traditional technical indicators which look at volatility, momentum, volume and trend, are useless and are therefore also “likely to mislead investors into making wrong decisions.” That is, technical analysis leads to the conclusion that oil may drop as low as $33 per barrel while the price may also increase to $75 per barrel.
The simple facts are that with the current oversupply situation, regardless of the reasons, and the current demand figures, again regardless of the reason, as long as these fundamentals remain in place, the oil price may have little hope of recovery.