The question that is waxing the minds of most oil traders is how long oil prices will stay low. Will they rebound back to $100 per barrel level again in the next 6-12 months. The chart below shows how strong crude oil downtrend has been in the last year.
The boss of oil giant BP’s boss Bob Dudley has said that oil prices could remain low for up to three years. He added that could send UK petrol prices below £1 per litre. He told BBC Business editor Kamal Ahmed in Davos BP was planning for low oil prices for years to come. That is expected to lead to job losses and falling investment in the North Sea oil industry and elsewhere, curbing supply and eventually forcing the price back up.
So this battle for the crude oil market is going to continue for more years. No body could predict this dramatic fall of the crude oil price in the beginning of 2014. Now that crude oil is trending down, expect it to trend for many more months in the down direction. Crude oil is well known for trending for long times. Now it is not a question of supply/demand. It is the question who will blink first? Saudi Arabia or the Shale producers in US.
U.S. shale drillers won’t scale back output quickly enough for OPEC to avoid production cuts this year, according to a quarterly poll of Bloomberg subscribers.
Forty-nine percent of analysts, traders and investors surveyed said the Organization of Petroleum Exporting Countries will have to lower its production target this year, while 34 percent said shale drillers will lower output in time. Seventeen percent weren’t sure.
The collapse of crude oil over the last year is one of the biggest asset crashes since the Great Recession and where there’s crisis, there’s often opportunity.
From a historical perspective, this collapse ranks a bit smaller than the crash in 2008. During that period, crude dropped from $140 per barrel to $40. While the current drop from $108 per barrel during the June 2014 peak to $46 is significantly smaller, that they’re comparable at all is staggering.
As a commodity trader, you could have made a windfall profit in the last 6 months. The important question is when crude oil market will find its bottom. Will crude oil touch $20 per barrel? Nobody knows. It is a guessing game. Modeling the crude oil market as an oligopoly and applying game theory can help us understand the outcomes in a much better manner as compared to analyzing the market in terms of supply/demand.