There doesn’t seem to be a lot of consensus on commodity prices in 2019. Or rather, opinions seem to be at polar opposites. Depending on who you ask, commodity prices are either going to rally in 2019 or be depressed. There are a lot of different reasons why a single commodity could be bullish or bearish, which is why there are varying degrees of sentiment on the most widely traded commodities (gold, silver, oil). Unfortunately, these wildly contrasting estimations can make it difficult for investors who like to trade the energy sector.
A quick refresher: a commodity is any raw, unprocessed material. All commodities can be places in one of four sectors: Energy (crude oil, natural gas, coal), Metals (gold, silver, platinum, copper), Livestock (live cattle, pork bellies), and Agriculture (coffee, wheat, corn, rice,).
When you invest in a commodity you are speculating on what it will be worth in the future.
If you invest in oil, you are more concerned about where oil prices are going to be in three to six months. That’s why investing in commodities is referred to as “future’s trading.”
Oil Prices Remain Volatile
Guessing where oil prices will be trending in six months might seem easy, it isn’t. There are a myriad of factors that go into pricing a commodity. And it can change very quickly.
Case in point, on Monday, January 28 oil prices fell about three percent, the biggest one-day percentage drop in a month. Why? An increase in U.S. crude drilling suggests there will be an increase in supply. Concerns about an economic slowdown also point to less demand.
Fast forward one day, and oil prices were up three percent. Why? The U.S. Treasury said it would be levelling sanction on Venezuela’s state-owned oil firm Petróleos de Venezuela SA (PDVSA). Sanctions against the world’s largest oil reserve removed the headwinds from the previous day. Predicting those kinds of events six months in advance isn’t easy.
What about Canadian oil? Oil prices were very volatile in the last three months of 2018, which will have a material impact on fourth quarter results from the country’s largest oil and gas companies.
During the fourth quarter, U.S. benchmark West Texas Intermediate oil prices tumbled 16% from the previous period. That’s nothing compared to what happened in Canada. Prices for West Canadian Select slumped 59%. The fall in the heavy oil bitumen Canadian blend is being blamed on the high cost to refine along with export pipelines being at capacity.
The price for Edmonton Par crude, which is lighter than West Canadian Select, was down 45%. That decline occurred after the Alberta government implemented production cuts slated to begin on January 1, 2019. There are around 25 oil and gas companies that produce more than 10,000 barrels of oil per day in Alberta that are being affected by the government-mandated production cuts.
The fall in world and Canadian oil prices could lead to cuts in capital spending plans, which could affect how companies provide 2019 guidance, which will also impact share prices.
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