Is "Now" The Right Time to Sell if You Are a Mineral Rights Owner? The Petram Group Releases its 2nd-Half 2019 Oil Price Outlook
DENVER, June 27, 2019 /PRNewswire-PRWeb/ -- Recent Oil Price Movements
In early June 2019, West Texas Intermediate ("WTI"), the de facto proxy for U.S. oil prices, officially entered into a bear market. A security or commodity is considered to be in a bear market when prices fall more than 20% from the most recent high. Oil prices continue to prove incredibly volatile as this marks the third time since just 2017 that oil has entered bear market territory. This most recent fall took oil prices from above $65 per barrel in late April to as low as $51 in mid-June, before quickly rebounding to ~$58 at the end of June.
Oil Price Volatility
What exactly causes these wild price swings in oil? That is a question that has long been without a definitive answer from economists. Most people will cite supply-side issues like changing OPEC policies, increasing or decreasing stockpiles or political unrest as the driving forces behind sudden price movements, but do events like these actually directly translate to price changes? Recently, Sergio Rebelo, a finance professor at Northwestern University's Kellogg School of Management, published findings (available at https://isen.northwestern.edu/what-makes-oil-prices-so-volatile) which were summarized on Northwestern's Institute for Sustainability and Energy website, and state:
"Supply explain only about half of the jumps in prices...turning oil production on or off is a serious decision that costs millions of dollars...It's not like you have a tap, like you're in the bathtub and you can put in more warm water or less. That difficulty in adjusting supply in the short run explains why a full half of oil-price fluctuations were due to changes in consumer demand, which moved up and down according to the changing needs of the world economy."
What Will Oil Prices Do in the Future?
Armed with the knowledge that oil prices are equally impacted by both changes in supply and demand, can we predict where oil prices will be in the future? The Petram Group believe the honest answer is "no." Predicting the price of stock or commodity at any given point of time in the future is a nearly-impossible task, and more akin to guessing than anything. Without being able to see into the future to see seismic shifts in supply or demand, the simplest assumption for future oil prices is that supply and demand will continue to remain in equilibrium, which can either mean assuming future oil prices will remain the same as today, or potentially more useful, looking at the historical, inflation adjusted price of oil and assuming prices will move towards that average. This latter approach makes sense since historically supply has always come back into line with demand, and the average is the price that the market settled on over several decades.
According to the U.S Energy Information Administration ("EIA"), the average inflation-adjusted oil price for the last 35 years is $54.33/barrel. Because supply and demand are currently more or less in equilibrium and projected to effectively be in-line in the near future, a significant movement in oil prices shouldn't be expected. Based on this, The Petram Group feels a justifiable assumption is that oil prices will continue to hover around $55/barrel for the foreseeable future.
SOURCE The Petram Group
