What to Expect With Oil Prices

Watching the financial media over the past couple of weeks, the hottest topic out there has been oil prices... Let's revisit what has happened to prices across the past few years. Take a look at this chart... Prior to the Russian invasion of the Ukraine, oil prices were relatively steady in a range of roughly […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] What to Expect With Oil Prices By Enrique Abeyta --------------------------------------------------------------- [This could literally save your retirement]( The man CNBC called "The Prophet" says he'd put 50% of his kid's college fund in this stock. [He reveals the name and the ticker symbol here](... --------------------------------------------------------------- Watching the financial media over the past couple of weeks, the hottest topic out there has been oil prices... Let's revisit what has happened to prices across the past few years. Take a look at this chart... Prior to the Russian invasion of the Ukraine, oil prices were relatively steady in a range of roughly $50 per barrel to $75 per barrel. There was the wild fluke print when oil prices went negative (remember that?) during the pandemic period, but the price has been pretty consistent in that range. Even looking back across the past year, oil prices had somewhat settled into these levels. The exception obviously was with the Ukraine conflict, where oil spiked well above $100 per barrel and stayed elevated for about six months. I like looking at this five-plus year average because it tells us a lot about the state of supply in the oil market. Most financial pundits focus on the demand for oil – asking whether we will have a recession or not and the impact on the oil price... In my experience following oil and energy stocks across my career in the markets, supply is the real ultimate driver of prices. This is also why the averages have been relatively consistent. With the growth of U.S. production across the past decade, we have seen a global oil market that is much more balanced than ever before, and with a decent ability to adjust to market demand. The combination of the modernized U.S. capacity along with the available slack capacity in Saudi Arabia has created a market that can more easily adjust to the market situation. Note that I said "more easily" and not "easily," because there are still a lot of constraints on the ability to add more capacity. But when you take into account the "black market" capacity out there with both Iran and Russia, the market likely has quite a bit of available capacity that can come back online. Again, this is why the average price has been so consistent. What's happening now? Oil prices in the current market seem in some ways like a pendulum – one that can swing a bit too far in either direction. Off the back of the Ukraine conflict, the price swung a bit too high which then had the effect of eliminating some demand and bringing on some marginal capacity. The Russian oil also found its way onto the market given the high prices. As the price moved back toward the lower end of the range, though, the market adjusted. The Saudis and other major oil producers cut production and U.S. producers showed restraint in capacity additions. Combined with some complacency about oil in the financial markets, this sets up a situation for oil to move back higher. --------------------------------------------------------------- Recommended Link: [Whitney Tilson lunches with controversial friend]( "I just had lunch with the man who accurately predicted the crash of '87," Whitney says. "And I asked him if I could send you his latest research... including what he's predicting next, where he believes the market's going, and the controversial technique he uses to make such accurate calls." [Click here to see what he had to say in his recent presentation](. --------------------------------------------------------------- What happens from here? A good rule in the commodity markets is higher prices solve higher prices. On the margin, we'll likely see what happened in the second half of 2022. Some demand will come down while some incremental capacity will also be brought back online – all in response to higher prices. Remember that it isn't in the best interest of the major oil producers – especially those whose economy is entirely dependent on oil prices – to have oil at $150 per barrel. It's much better to have a "not too hot, not too cold" situation in oil prices. This is where we have been for the past decade, and what will likely persist in the intermediate term. What does this mean for the economy and stock market? The overwhelming effect of oil prices on both is through gasoline prices. Take a look across the past five years... You can see here that these have been more volatile than oil prices. In particular, they moved much higher in the middle of 2022. The recent move has taken them from just above $3 per gallon back up to almost $4 per gallon. This is not good for the consumer. But it's important to put this in perspective... Americans spend a little bit more than 3% of their budget on gasoline. This means that this 25% move in gas prices is about a 1% hit to consumers, or about $40 a month. That isn't good... but isn't the end of the world. It's also around the prices we were paying a year ago. Higher prices are much more painful when they first move higher, as consumers need to make more adjustments. Many consumers had already made this adjustment to higher prices a year ago and are a in a better position to do so again. This is without taking into account the growing spread of electric vehicles and how this will eventually change this dynamic. While the financial media loves apocalyptic headlines, the real story in oil prices and the energy market seems to continue to be a "goldilocks scenario" of "not too hot, not too cold"... and I would expect this will persist in the near future. Regards, Enrique Abeyta P.S. I just published my latest recommendation in Empire Elite Trader... Of the 35 trades I closed this year in Empire Elite Trader, 33 of them were winners. That's a 94% win rate... And that's in a world where the best hedge fund managers only win on about a half of their trades. To learn more about Empire Elite Trader – and find out how to gain access to my latest recommendation – [click here](. --------------------------------------------------------------- If someone forwarded you this e-mail and you would like to be added to the Empire Financial Daily e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2023 Empire Financial Research. All rights reserved. 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