Why The Right Price For Oil Is Between $60 And $70
Before we get into this topic, let me remind readers that crude oil prices are determined on the global market and natural gas and natural gas liquids (NGLs) trade on regional markets. The vast majority of upstream oil & gas companies produce a mixture of these three commodities.
Crude oil is one of the most actively traded commodities in the world. Crude oil prices are actually set by speculators that trade oil on the futures market. The oil price you see quoted in the business news each day is the front-month NYMEX contract for West Texas Intermediate (WTI). If you live in Europe, it is the front-month contract for Brent. Supply/demand fundamentals eventually determine the price of oil, but all energy sector investors know that “eventually” can take a long time to arrive.
Today, the “right price” for oil is somewhere in the $60 to $70 per barrel range.
On Nov. 30, 2016, OPEC decided to shore up oil prices by announcing an agreement to curb production for the first six months of 2017. The price of WTI oil immediately jumped $8/Bbl and moved into a range of $50 to $55 where it seemed to stabilize. The speculators went long on oil, expecting the cartel’s actions to show up quickly in the U.S. storage reports. They forgot some important facts about the oil market:
Written by Dan Steffens