Oil, whether you like it or not, is a necessary commodity. In this day and age, oil is important because it is a basic foundation of the economy. Without it, major sectors like the transportation and petrochemical industries will cease to function.
And as the price of this black gold increases, so do other goods. Think about it… Higher oil prices make it more expensive to cultivate, gather, and transport agricultural commodities. In addition, it makes quarrying, refining, and transporting precious metals more costly. Even currencies like the Canadian dollar and the Australian dollar are known to increase in value when oil rises.
Why am I talking about oil? Well, based on my research, it appears that the price of oil is going to go up… way up. Here are the 4 main reasons why:
1. Price says so
Technically speaking, oil has broken out to the upside of a huge symmetrical triangle. This is a big bullish signal, as it means that the buyers have finally managed to beat the sellers. Moreover, the Stochastic indicator has been posting higher lows, confirming the move.
2. Stronger U.S. growth will stimulate demand
The most recent GDP report from the U.S. shows that the economy is picking up pace. Even though the Q1 figure was revised down, Q2 was strong as ever, showing a whopping 1.7% growth rate. It was significantly higher than the 1.1% growth initially forecasted. In response, traders took the price of oil to $104.33/barrel. Given the positive outlook on the U.S. economy, we could see a lot of support for oil during the second half of the year.
3. Oil supply is hurting
Due to the geopolitical tension in the Middle East, Reuters has estimated that 700,000 barrels of oil are lost per day. Reuters expects this number to rise to around a million, which is 1.1% of the world’s output. That might not seem much, but the uncertainty surrounding the situation is worrying the market. If it deteriorates further, we might be looking at a shutdown in oil production, which will hurt oil supply.
4. Inflationary monetary policies will eventually push oil higher
Given the developments since the beginning of the year, it’s pretty clear to the market that the major central banks have a focus on growth rather than keeping inflation within their targets. As such, they are doing as much as they can to stimulate the economy.
In Japan for instance, the Bank of Japan (BOJ) has taken an aggressive stance to fighting deflation. In the U.S., the Federal Reserve has engaged in open-ended quantitative easing to the tune of $85 million a month. Although there is talk of tapering, the actual scaling down of asset purchases has yet to be confirmed. And finally, in both the euro zone and the U.K., interest rates are at all-time low and central banks have confirmed that they will be there for “an extended period of time.”
It isn’t evident now, but given enough time, the increased money supply and the ultra-easy monetary policy will trickle down the economy and push prices higher. Can you guess which among the commodities will first be affected? That’s right, oil.
At the end of the day, however, nothing is set in stone. What I have written here is just my opinion based on my research. As knowledgeable and smart traders, the most we can do is do our own research, make educated guesses, and be flexible.