A little over a week ago, the markets were getting increasingly excited over a sudden rise in the price of crude oil.
There was even talk that a breakthrough agreement between Russia-OPEC would hammer out individual country production quotas.
Both Saudi Arabia and Russia are heavily reliant on revenues from their energy sectors to balance their budgets and maintain costly social programmes and large public sectors.
The collapse of the price of crude has forced upon both OPEC and non-OPEC petroleum-producing nations to undertake to severe belt tightening which has reigned in government spending.
The talk about talks could have been the catalyst for the bottom to have formed under this cataclysmic collapse in crude prices.
However, the talk about talks was nothing more than a false hope for commodity investors. The assumption is that the Russians planned to reduce production anyway, so they tried to broker a deal with the Saudis which would have included OPEC. The Saudis are reluctant to help Russia.
The failure to reach an agreement has coincided with the soon to be released Crude Oil Inventories report from the Energy Information Administration. The fear amongst investors is that increasing inventories will just add to the global glut of crude oil.
All this news has been the main driver for the exceptional volatility that has gripped the price of crude oil. In the past 2 days, crude oil has seen its value decline by 11%. This equates to the largest 7-year fall for crude oil. All of this means that we are now back to where we started with WTI once again trading under US$30 per barrel.
Although the market continues to grind lower, many analysts are predicting that crude will rise substantially during 2016 with Brent reaching US$48.00 by Q4. This will equate to a 50% rise from the current price of US$32.00 for Brent crude.
One reason behind analyst’s bullish predictions is the United States Energy Information Administration’s forecast, which indicates that domestic production is to drop by 620,000 barrels per day during 2016.
Inventories and crude have an inverse relationship. If this inverse relationship holds true, then we should see the price of crude begin to edge higher.