The Price of Oil Explained

The Price of Oil Explained

This is a Guest Post by AK of Fallible

AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.

What the heck is going on with oil??? Why have prices crashed over 30% in the last few months?

Well that’s what we’re going to talk about today on Real Vision’s The One Thing.

Now the first thing to understand about the “oil price” everyone talks about is that it’s actually the WTI Crude Oil future front month contract. So it’s a derivative!

The reason we look at this futures contract is because of the amount of money that trades transparently in that market. So you can really see the supply and demand in action. And just like everything else, the price of oil is determined by supply and demand. Supply comes from oil producers, and demand comes from a healthy economy that needs oil to function. If there’s more demand than supply, prices go up. If there’s more supply than demand, prices go down.

Now originally, oil ran up 84% from it’s low in 2016 to its high in the beginning of October. And that rally started after some tough sanctions were put on Iran which hurt their ability to sell oil, thereby reducing supply. Plus global growth was still decent back then, so demand for oil was solid. So with more demand than supply, prices shot up. But now Trump has softened those same sanctions on Iran, letting them sell oil to China. And the world is slowing down economically. So demand is falling while supply is increasing — and that’s why prices are dropping
And as always, stay Fallible out there investors!

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***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.