Amid chaos in politics and foreign policy, oil prices continue to fluctuate and slowly raise behind the scenes. While oil production soars, US officials warn of a potential collapse due to overproduction, and actions around the world are changing how the US oil prices are determined. Before trying to divine the future of oil prices and how they affect the economy, you must understand how a few different factors are taking on major roles in the oil market.
Federal Reserve Releases Weak Dollar Reports
On March 20, 2015, the Federal Reserve announced oil prices will continue to rise as current sanctions on Iran’s nuclear industry expand. The Federal Reserve reports the US dollar is weakening in light of political actions. Lower US dollar values equate to more resources spent obtaining imported and domestic oil. As a result of the Federal Reserve’s March 20th report, the US Central Bank made a bold move, affecting the course of oil loans.
Interest Rate Change
Investors expected the US Central Bank to raise interest rates, which would result in a boost of returns on investments across a whole economic scope, including protection for current oil field workers, oil loans, and reactivation of additional oil rig drills. The Federal Open Market Committee had previously iterated their decision to remain patient until the US Central Bank raises interest rates. On March 20th, the committee dropped this plan. Detrimental to current futures, the committee’s actions could result in the US Central Bank raising US interest rates at the dawn of summer, signifying the potential for higher rates for oil loans throughout the remainder of this year. Many investors have asked questions over why and if current dwindling numbers of US oil rigs will affect oil prices.
Oil Rig Production and Employment
Thanks to a dedicated team of drillers and technological advancements in locating oil deposits in Oklahoma and Texas, in particular Midland, have garnered the largest oil boom in US history, essentially increasing oil production totals for currently operating rigs. As multiple oil rigs shutdown, current oil production has remained steady, resulting in a surplus for both US domestic and export use. Many have voiced concerns regarding current employment among declining numbers of oil rigs, but today’s demands for oil production guarantees job security for at least another year. However, Middle Eastern influence on oil prices cannot be understated.
Saudi Arabia and Iraq
US Central Bank officials await a period of global calming prior to raising interest rates. Which was tossed out the window when Saudi Arabia launched airstrikes against Yemen on March 26th. These airstrikes resulted in an immediate jump in oil prices by two percent since market closure on March 25th. Yemen produces a nominal amount of oil per day, approximately 133,000 barrels, which does not impact the global economy drastically. Saudi Arabia and Yemen’s means of export via the Bab el-Mandeb strait has been “bottlenecked” by the airstrikes. Unfortunately, this results in the loss of millions of barrels from Saudi Arabia, causing a shift in current supply and demand globally.
As investors and traders continue to look for a sign of how oil prices will behave in coming months, the Federal Reserve, US Central Bank, increased Texan oil production, and Middle Eastern actions will continue to affect how oil prices change. Higher levels of unrest result in higher oil prices due to lowered production. A weakening US Dollar and US interest rates also play a huge role in how the economy will react.
More time and information is needed to determine when and how the Federal Reserve will enable US interest rates to rise, which will bring forth a significant return on investment for investors in oil loans, oil futures, and other oil stocks. Ultimately, the cost of borrowing money for oil production will be much higher come summer, so investors should take advantage of today’s prices and rates before the coming hike.