Where are oil prices going and why is it so volatile?

December 2017 | Posted in Energy
Energy
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As we close out the year everyone is wondering what is in store for 2018 when it comes to oil prices. Over the last ten years we have seen the pricing for WTI hit $145 per barrel in 2008 and sink to $29 per barrel in 2016. It has seemed to be up and down along this whole time period. Now in 2017 WTI seems to be cruising around $50. There have been dips to the mid $40s and peaks in the mid $50s but nothing like 2015 and 2016 brought. So where do we go from here?

The short answer is more of the same. In their latest update the EIA predicted WTI to average around $53 per barrel and NYMEX futures are closer to $57 to $58 per barrel. That is a pretty good prediction that somewhere in the $50s is where we will end up. There is cause for optimism. In December 2017, oil prices hit a 30-month high. Traders responded to the November 30, 2017, OPEC meeting where members agreed to keep production cuts through 2018. However, prices have been volatile thanks to swings in oil supply versus demand. That’s because the oil industry has changed in fundamental ways.

Oil pricing used to be more predictable. They surged in the spring as oil traders anticipated higher demand and once demand peaked, prices dropped in the fall and winter. There seems to be several reasons why things have become more volatile. First, OPEC has begun to lose its ability to truly control pricing. Second, foreign exchange traders have driven up the value of the dollar considerably. The value of the dollar has spiked by 25% from 2014 to 2015. Third, global demand grew much more slowly than anticipated. Accordingly to the IEA, it only rose from 92.4 million barrels per day in 2014 to 93.3 million barrels per day in 2015.  All of these have contributed to the increased volatility in the market.

So where do we go from 2018? According to the EIA annual energy outlook, the current estimate for oil prices (based on 2016 dollars) will be $95 per barrel by 2030 and increasing even further to $117 per barrel by 2050.

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