Oil: Supply and Demand

Crude oil prices in the U.S. have experienced a volatile summer, but overall they are dropping to some of the lowest levels seen in months. This is good news if you are going to the gas station — gasoline prices are consistently down from a record high of over $5 USD per gallon, on average, in early June. But why are they dropping, how low will they go, and what does it all mean for investors?

Supply & Demand

There are many factors that influence the price of oil, but most of it comes down to supply and demand.

This summer, demand for oil has fallen, and if the U.S. enters a recession, it will continue to fall. Mounting fears of a recession have been one of the main drivers of price decreases since June. A decrease in demand due to a recession would surely cause the price of oil to decrease further.

So, what about the supply?

The present sanctions on Russia have crippled supply, which drove prices sky high in the spring of this year.

Since the sanctions were imposed, the US and other nations have been tapping into their own oil reserves to help stabilize the supply. However, according to an early August statement from ​​OPEC+, stockpiles are dwindling, and the “severely limited availability of excess capacity necessitates utilizing (oil) with great caution in response to severe supply disruptions.”

This news, amidst the EU’s impending embargo on Russian imports starting Dec. 5 and a decrease in US production to boot, points to continued stress on supply.

And when supply shrinks, prices rise.

The Future Price of Oil

As US-Iran nuclear deal talks continue, there’s still a lot that hangs in the balance. Over the next few weeks, the US will decide whether to reopen the Iranian supply. This and the looming recession are just two factors that will play a key role in the future price of oil. 

You may find more favorable investments, however, in the private sector. Opportunities to invest in oil are out there; some Reg-D offerings are available to accredited investors due to the JOBS Act. These opportunities may be some of the more profitable ventures if the stock market continues to dip and the U.S. does enter a recession.

If you’re betting on oil, you may be in for a rough couple of months. Investment banks are cutting their price forecasts, and many are turning bearish for the short term. However, experts say prices could rise again in 2023, given the current oil deficit and the cuts to production.

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