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Oil Seems To Be Recovering

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What's going on?

The oil price jumped almost 5% on Wednesday – it’s now over $38 per barrel. That’s a 3-month high and up 45% from its $26/barrel-low just one month ago.

What does this mean?

Data from the US Energy Information Agency sparked the move higher. It showed that demand for gasoline and diesel jumped much more last week than expected (higher demand is obviously positive for the price of oil). Another factor helping the oil price recently has been declining production: it seems that the low oil price is finally causing US firms to decrease the amount of oil they produce (lower supply is, of course, positive for the oil price). Goldman Sachs, the US investment bank, warned on Tuesday that there is still too much oil relative to demand, a.k.a the market remains “oversupplied.” But, right now, the market appears to be buying into the notion that demand is increasing while supply is declining.

Why should I care?

For markets: A sustainably higher oil price could be very good for markets. A lot of the recent market weakness was probably caused by the huge selloff in the oil price. Of course, it hurt energy companies but it also, for example, hurt banks that had lent to those energy companies. It contributed to the general view that economic growth was weakening substantially. To the extent that the collapsing oil price led markets down, a rebounding oil price could help lead markets up (indeed this is likely already happening).

For you personally: The price of gasoline is already starting to go up. Gas prices (e.g. what you pay to fill up your car) in the US had already jumped by about 4% in the past two weeks. Wednesday’s news make further price hikes very likely (this is broadly true around the world: higher oil prices will likely lead to higher gas/petrol prices).

Originally posted as part of the Finimize daily email.

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