Where Is Oil Headed?

Oil prices have been on a tear lately, and despite having several reasons to fall, black crack will probably hold its ground in the coming months. In fact, a Reuters poll revealed that economic hotshots are expecting WTI crude oil prices to stay above the $90/barrel mark in the coming years amidst the ongoing economic slowdown.

You see, there’s currently a stalemate going on between downward and upward pressures on oil prices, and because these opposing forces basically cancel each other out, oil will probably stick around its current levels. But since I know your wallet is complaining about rising gas prices just like mine is, let’s first take a look at some of the reasons why oil prices could sink.

One factor that could push oil prices down is the prospect of lower demand, spurred by global economic concerns. Among these concerns, as we all know, is the euro zone debt crisis, which could eventually hurt world economic growth and restrain demand for fuel across the globe.

It doesn’t help that the U.S., which is the world’s top oil consumer, is already in a rut. This also presents a threat to demand since the high level of uncertainty surrounding the economy is forcing industries to cut back on production, consequently reducing their fuel usage. If you paid attention during your Economics 101 classes, you’d know that downturns in demand push prices down.

Another factor that may put downward pressure on prices is increased oil supply from Libya. Since the death of Libyan leader Gaddafi, fighting in the country has eased, allowing oil companies to get back on their feet. They are likely to step up production from 400,000 barrels a day and churn out roughly 500,000 barrels each day by the end of the year.

Some are even projecting that oil production could eventually return to pre-civil war levels, which were at 1.6 million barrels a day. Imagine how much cheaper oil could become with this big jump in supply!

Still, there are those that believe that these recent developments count for naught, so let’s hop on over to the other side of the fence and see why some believe that oil prices won’t falter.

You can’t talk about demand for oil without discussing China. It is, after all, the world’s second largest oil consumer. As a matter of fact, it contributed to over half of the global incremental demand this year. And next year, many expect it to bump up its consumption even more. Some estimates call for an increase in demand of about 6% in 2012.

Likewise, other up-and-coming countries, such as Brazil, Russia, and India, are expected to maintain a strong thirst for the precious liquid to fuel their robust growths. Together, China and other emerging economies are expected to counteract weaker demand from the U.S. and Europe and keep oil prices afloat.

As for the case of increased oil supply from Libya, it will probably take some time before it can increase its output to pre-civil war levels. Serious repairs and new installations still have to be made on infrastructure that was damaged by the war and looting.

“So what, Forex Gump? What does all of this have to do with forex?!”

Take a look at the chart below, and see for yourself!

Chart Comparing Oil and USD/CAD

USD/CAD price action may be strongly affected by fundamentals and technicals, but you can’t deny that it has a very strong inverse relationship with oil prices. When oil falls, the Canadian dollar usually follows suit and USD/CAD pops up. On the flip side, when oil rallies, the Canadian dollar often climbs as well, resulting in a dip in USD/CAD.

That being the case, it would be wise to check out oil prices before committing to a long-term USD/CAD trade. If oil manages to hold its ground and keep from sliding, USD/CAD could very well trade and stay below parity again.

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