Oil prices have been on a downward spiral for roughly 20 months now because of an oversupplied market that is made even worse by a soft demand for oil globally.
But exactly how low can oil prices go? If you’re a trader, it’s imperative that you know if prices are reaching their lowest point or have bottomed out, because in a competitive market like oil trading, recognizing trends before they actually occur can spell the difference between profits and losses.
If you wait for analysts or industry groups to crunch numbers and churn out reports that confirm that prices have reach their troughs, chances are, it will be too late and you would have missed your window of opportunity to buy low and sell high.
So here are some subtle but important indicators that you should keep an eye on:
Declining production accompanied by increasing demand
Production and demand are the two major factors that analysts and seasoned traders watch out for day in and day out. Any analyst or trader knows that these are the two factors that significantly impact oil prices. What’s crucial is the ability to recognize market forces that push output and demand to go up or down, and whether these conditions support any such rise or decrease for a sustained period.
Major selloffs followed by significant price rallies
When price milestones are reached, traders tend to book profits. That’s how investment works. But when traders cash in, and prices still rally, that’s a good indicator that oil prices are beginning to recover and stabilize, indicating that the worst may be over and that prices are on their way to a rebound.
Market is especially resilient to bearish news or events
Oil prices are especially sensitive to fluctuations in major assets like stocks and currency. When bearish news come out but oil doesn’t rise or drop as much as it should, that’s typically a good sign that such news or event has already been factored in the price.
Everything looks bad and is confirmed by analysts and market players alike
When the market is bearish and the fundamentals support the sentiment, then it’s safe to say that prices have reached or is reaching their bottom. With everyone heading towards the same direction, swimming against the tide could just be the bet that pays off.
These indicators can be hard to spot, but if you pay close attention to trends that develop in key factors like stockpiles, output, demand and the economy of major oil consumers, then you will be able to make a more informed judgment that will ultimately lead you to making profitable investment decisions.