Betting on oil price movements is a risky business.
As history shows movements in the world price of oil is not always driven by just supply and demand.
The price of oil is highly sensitive to geo-political factors, plus the Organisation of Petroleum Exporting Countries (OPEC) has long played a role in determining supply and price.
Those old enough to remember will recall that during the 1973 Arab-Israeli War, OPEC Arab member states imposed an embargo against the United States in retaliation for the U.S decision to supply arms to the Israeli military.
The embargo sent shock waves through the U.S., led to scenes of cars lined up for petrol and damaged the world’s biggest economy. This oil shock was felt around the world. The Arab action was exacerbated by a U.S. domestic reliance on foreign oil. Then President Nixon drafted a new energy strategy to boost domestic production.
Turn the clock forward 40 years and a new battle has broken out between OPEC and the U.S. that has developed new oil supplies on the back of a modern production technique known as shale drilling.
With oil prices dropping below $30 US a barrel, there has been a lot of negative talk about the future for producers and the energy sector more widely. OPEC has stood defiantly refusing to countenance a drop in production in an oversupplied market, but this week there has been a softening in the language.
The London Daily Telegraph reported that Saudi Oil Minister Ali al-Naimi said he was optimistic that major producers would eventually come together to help rebalance the market.
“Market forces as well as the co-operation among producing nations always lead to the restoration of stability,” he said Oman, which is the largest Gulf producer outside OPEC, said it is ready to cut back production if other nations also relented.
And in another positive sign here in Australia, the AFR’s Matthew Smith reports that the National Australia bank’s investment arm, MLC is considering a bet on oil going up.
The AFR reported that MLC portfolio manager Ben McCaw was considering an options strategy to capture the “upside of a bounce in the price of oil”.
The low cost of oil is putting pressure on the Australian biofuels market – a lift in prices will ensure this important domestic market can go from strength to strength. This is particularly important following the planned introduction of a biofuels mandate in Queensland and changes to boost an established mandate in NSW. Meanwhile, London-based bookmaking arm Ladbrokes has bet even money on oil dropping slightly lower. That shows there is no such thing as a sure bet, especially when it comes to oil.