This week West Texas Intermediate (WTI) oil surged above $34.00, as traders received news that an agreement was reached by Saudi Arabia and Russia to cut oil production. While this a step in the right direction, it wouldn’t be wise to pop the champagne quite yet. A few important aspects of supply and demand are yet to be satisfied. And until a better state of equilibrium is reached, the outlook for the oil industry remains uncertain.
So what does need to happen in order for oil prices to continue with sustainable and steady growth? Here are three fundamental principles that must be satisfied:
1. Supply must go down
This means that oil production must be cut by both OPEC and non-OPEC countries. Compared with current demand, we’re not talking about small cuts. To see true results, the cuts would need to be in the 10% range. Additional agreements and adherence to these agreements will help along with Idle U.S. oil rigs not coming returning to operation as prices begin to rise.
2. Demand must go up
This will only happen with the recovery of the global economy. However; with China’s economy continuing to sputter and many countries in Europe and Latin America hanging by a thread, the outlook for an increase in demand looks somewhat distant. Additionally, as nations continue their focus to develop alternate energy sources, demand for oil will struggle to make consistent strides forward.
3. Global conflict must do down
Conflict produces uncertainty, and as long as there is uncertainty (particularly in OPEC countries), the price of oil will remain volatile. Resolution of ISIS and Syrian conflicts, to name a few, will help provide the stability needed for oil prices to reach true market price.
With recent global developments, it “seems” we are headed in the right direction, but until these three underlying economic principles are satisfied, we’ll continue to see a cap on the upside in oil. The battle may be won, but the war still continues.