The Push And Pull Effect On Oil Prices

| About: The United (USO)

Summary

After struggling this week, crude prices remained at the $50 level. Daily fluctuations have been minor.

There appears to be a push and pull tug maintaining crude prices in a narrow range.

Push effects are observed in a tightening of supply noted in the Asian markets. The IEA forecast for tightening is slow and painful lasting into 2017.

Headwinds are creating a pull effect which is a drag on the price of oil.

Pull effects include: slow global growth, failed talks limited to only freezing production, and a $50 price ceiling that is an incentive for Frackers to increase crude production.

Crude prices struggled to move higher this week but wound up trading at $50.85. Daily fluctuations are observed in the graphic below. Crude peaked mid-week and retreated to the $50 range by Friday.

Push Effects

As seen in the graph above, there is a push effect which is likely triggered by optimism over what some analysts see as a tightening Asian market.

Click to enlarge

From sharp cuts to Chinese oil production and falling inventories of refined products, signs are mounting that Asia's oil markets are slowly returning to balance. A shortfall, however, is not expected until 1017.

The IEA expects the tightening process to begin in the second half of 2016, but it will be a "slow and painful" process with declining global demand and greater OPEC supplies coming online.

Pull Effects

Currently, pull effects like the rallying dollar limit the crude price as seen in mid-week. Other pull effects include:

  • A global slowdown in economic growth with increasing debt burdens.
  • The hype from failed OPEC talks that focus only on freezing, not curtailing production.
  • Incentives for U.S. Frackers to profit from $50 crude.

Take Away

Where is the price of oil going? In my opinion, oil is currently trapped in an oil price vise at the $50 level. This is a freeze point, a supply demand balance where price vacillates in a narrow range.

For investors, push and pull variables are in play and must be analyzed to determine which has the stronger tug or if they remain in balance.

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