The Price of Oil. A Demand Story?

Dear Reader,


The price of oil hovers around 54.50 USD for West Texas Intermediate Crude Oil and 58.53 USD for Brent oil.

Is oil undervalued? Yes. I think world energy demand, even though economic growth is slowing, supports prices of around 70 USD for WTI and 75 USD for North Sea Brent oil.

Many people will point to the high supply of oil coming mainly from America, Russia and Saudi Arabia. Yes, oil supply is plentiful, but OPEC + Russia recently agreed to extent oil supply cuts.

I think the major factor that supports higher prices for oil is world demand. The price of oil reached 140 USD in 2008 and the world economy is considerably bigger than in 2008. Yes, oil supply has increased, but the current oil prices look too depressed for my liking.

The demand for oil is inelastic, because oil is used for transportation of necessity goods like bread, water, potatoes, rice etc. without which people simply cannot exist. What is more, people will need to travel to work, for leisure and so on. So even if the oil price abruptly rises, there will still be demand for oil. Oil demand is not exogenous. The price influences demand and supply influences demand.

The main beneficiaries from a higher oil price will be the major oil corporations like Exxon Mobil, Chevron, BP, Shell, Total, Gazprom, Lukoil and hydraulic fracturing oil producing companies like Marathon Oil Corporation, Anadarko Petroleum, Chesapeake Energy Corporation and so on.

Russian oil companies like Gazprom and Lukoil, especially, are quite undervalued. Petroleo Brasileiro is another oil major that should benefit handsomely from higher oil prices.

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Petar Vladimirov Posledovich is not liable for any investment losses incurred by reading and interpreting blogposts on this blog and posts on social networks.

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Respectfully yours,

Petar Posledovich