3 Reasons Why Oil Prices Can Hit $5.00
Crude Oil futures just broke below their March 2020 lows and are plunging even after President Trump brokered a deal for OPEC to cut production. There’s a growing consensus that oil prices will be trading in the low single digits and some traders believe that “the new normal” for oil will be near $5/barrel. Here are three reasons why:
Economics 101: Supply & Demand
Economics 101 tells us that price is a function of supply and demand. Right now, supply is surging across the globe and demand is plunging. Eventually that will change and demand will increase but even when it does many people believe that it will not come close to absorbing the global supply glut.
Demand Is Evolving: The Green Movement
The world is changing and human behavior continues to evolve in ways that are hard to predict even when you were a kid. When you were 10 would you ever believe that we would be driving around in electric cars? That was something that even Hollywood didn’t imagine. Back To The Future Part 2 imagined a world with flying cars that were powered by our compost.
In recent years, thanks to technology, one of the new trends that has slowly emerged, but continues to grow, is the green movement. People want to go “green” and that means lower demand for oil. Tesla TSLA introduced an affordable electric car and sales have surged. The company also released other electric vehicles (cars, crossovers, trucks, and SUVs) and demand is off the charts.
Just about every other major automobile company is working hard to develop their own line of electric/green vehicles. It is just a matter of time until the technology improves and other means of transportation go “green” as well. All that translates into a big drop in demand for energy. Maybe fully electric planes are not going to begin flying tomorrow but the demand for green everything is a formidable force (and growing).
Any “old-timer” in the energy market remembers when Natural Gas was trading at much higher levels. But that world has changed. Back in 2005, Natty was trading in the mid teens but since then it has plunged to low single digits and has stayed there since 2008. Why? Because post 2008, supply has greatly exceeded demand.
Anything can happen with oil prices. Supply shocks happen…Demand can spike back up. But all we know right now is that oil is in a bear market and the path of least resistance is lower… for now. Trade accordingly.