Crude oil prices have been going in an upward trajectory over the last few weeks now, and it’s showing no signs of abating.
With U.S. stockpiles declining and outages in many countries including Libya and Nigeria causing global production to fall, it’s easy to see why oil prices are rallying. In fact, Goldman Sachs now predicts that oil prices will rally to roughly $50 per barrel in the second half of the year.
That’s a significant rally, but compared to June 2014 when oil was selling at roughly $105 per barrel, the recent recovery in prices is still just a drop in the bucket. Nevertheless, many wonder if the oil price rally will continue.
Several factors impact the price of oil, but three important factors suggest that the trend will likely continue. Let’s look at each one of them.
1. Falling U.S. Dollar
Oil is one of several assets that are denominated in dollars. When the greenback is strong compared to six other trade-weighted currencies, oil prices drop.
While the dollar has been up and down day over day, it has fallen significantly year to date.
Rival currencies like the euro are also making a rally. And because they are inversely related, a stronger euro naturally leads to a weaker dollar, which in turn lifts oil prices.
2. Declining production and stockpiles
Major disruptions in production in several countries including Canada, Libya, and Nigeria are causing global supply to go down, eating away excess supply that have cause prices to drop significantly.
Meanwhile, U.S. shale output has been dropping over the last seven months and is expected to remain low in the near future.
3. Rising Global Demand
U.S. investment bank, Goldman Sachs, is predicting a market rebalancing in the second half of 2016. It cited rising global demand for crude oil as the main reason.
In its May 2016 forecast, the forecaster revised its global demand growth forecast by 200,000 barrels per day anticipating higher demand for oil in Asia, particularly China.