Crude Oil Analysis

The objective in this post is to analyze crude oil prices with respect to two parameters initially and propose to look at further parameters to fully understand the things that do affect the pricing or crude oil on a general basis in the markets. 

What we can see in the table below is Price of Crude oil with regards to Inflation adjusted prices, and compare that against Nominal Prices as well as Inflation in the corresponding Periods.Moreover, we look at Production & Consumption on a daily basis, as well as the change in the Consumption and Production Variable over the years. 

One thing that strikes out from the table is the fact that much of the Crude oil Price on an Inflation adjusted basis is 

1) Nowhere close to the Top,but is significantly above the all time lows. Suggesting more of an all time downside to the upside rewards for taking the risk of investing into Crude. 

2) Inflation on the other hand is close to the lows seen during the 1960s right before the double digit inflation witnessed in the US for the next decade.

3) Differential between Nominal and Inflation adjusted Crude Price was higher during 1970s as compared to todays differential.

4) Consumption has outstripped demand in the last two decades, and has infact grown up 200 percent from 2000-2010 ( a big factor in the rise of crude oil prices)

The data above shows a  positive bias for crude oil prices on a demand driven basis, but not as much of a solid footing based purely on inflation and its threats (which even though obvious, is hard to determine with regards to timing and becomes more of a speculative game, rather than one based on pure fundamental basis)

Now the question here is what could bring down the supply demand gap, and if there is something that can what happens to the price of crude oil. 

While it is hard to predict what happens to the price of crude oil, it is much easier to say how and what can decrease the Consumption/Production Differential. 

1) Increase in Exploration and Resulting Production from new reservoirs

       A lot of efforts have been concentrated by many companies in their search for and production from new reservoirs of Oil, while the problem is usually the lead time from Exploration , Discovery & Production an increase in the crude oil supply from these new discoveries could negatively affect the Consumption/Production differential. 

Henceforth, we suggest to look at the number of such production process underway , and the potential increase in crude oil supply estimated over the future years. 

2) Change to Renewable Energy : If crude oil prices are to remain stubbornly as high as they are, renewable sources of energy could fill in the gap at some places decreasing the marginal demand at some places and substantial demand at others ( while it is hard to predict where, Utilities and Transportation is seeing a huge shift from Crude Oil Usage to CNG and Electric Cars) 

Again while the process is slow, it is still underway and the ground no doubt is dynamic and shifting. Last but not the least Department of Energy publishes data on Crude Oil Reserves for United States, a really helpful determinant in the short term. 

All said we at ValueeInvestor believe Crude oil might go high, or might go low in the coming years. We do not have any idea as to the course of actions , but what we definitely know is that we would want to stay away from the asset class, and have none of it in our portfolio. 

Crude Oil Data

DISCLAIMER :To be sure we are in no way predicting or advising anybody to take action, the research is based purely for and on an educational basis.Any actions taken based on the research is purely ones own decision, and we do not take any responsibility for the same.