Whether it’s in the form of a golf ball or gasoline, oil is used in just about everything in the world. The modern history of oil began in 1859 and has since been one of the most important commodities in our world today. It is for this reason that the dramatic drop in the price of oil has been felt around the globe.

In the last two years, the price of oil at one point experienced a decline of 75 per cent from US$110 dollars a barrel to under US$27.

From the outset this may seem like a wonderful thing for consumers. However, the consequences of ultra-cheap oil have been felt around the world in a dramatic manner. For countries such as Angola, Nigeria and Venezuela whose economies are heavily reliant on exporting the commodity, it has been a living nightmare. What was once the driving force behind economic growth in Angola is now the reason for a stagnated economy and increased rate of inflation.

Similarly, it has had profound impact on the performance of financial markets. Though it has improved in recent months, investors are still worried about its implications. Others, on the other hand, see it as an opportunity.

Drowning in oil

Although it may seem like a complicated issue, the drop in oil prices comes down to the law of supply and demand. Simply put, the global decline in economic growth, resulting in a lack of demand, along with a continued oversupply of oil, caused the price to drop and remain low.

Oil production in the United States increased by nearly 100 per cent in the last several years (production is at its highest in almost three decades) leading to a decrease in the need for imported oil. Countries that previously supplied the US with oil (Nigeria, Algeria, Saudi Arabia amongst others) have as a result turned to markets such as Asia and have had to drop their prices to compete with each other.

Similarly, leading members of the OPEC (Organization of the Petroleum Exporting Countries) such as Saudi Arabia have shown little sign of slowing down production. Russia, with its weak economy and devalued currency, has also opted to continue with production as oil and gas constitute 70 per cent of its exports. Additionally, low oil prices are welcomed by Europe’s economies that are suffering from weak growth.

In the financial markets, the obvious losers have been oil companies such as Chevron, Royal Dutch Shell and BP. All of them have announced cuts to their payrolls and perhaps more importantly have experienced significant decreases in the price of their stock, while those who invested in oil and gas company bonds have suffered combined losses of more than US$150 billion.

Other sectors such as the banking sector have also been hit hard as a result of loans to the gas and oil industry.

Nonetheless, where there is a problem there is an opportunity. Many investors have also come to view the oil price drop as an opportunity to cash in on the recovery of oil prices. Crude oil prices have recently hit 2016 highs and have at times experienced short-lived periods of increased prices. Since the beginning of the year, oil prices have increased by more than 80%, going from US$27 per barrel in February to US$50 per barrel last week.

Financial institutions such as Goldman Sachs, which previously had a negative outlook on the price of oil, has acknowledged that there are several factors supporting positive prospects on oil prices. Analysts from UBS Wealth Management Research have resonated similar outlooks explaining that oil prices are unsustainably low resulting in insufficient profits for producers.

While the price of oil may not rebound to pre-2014 levels, there is a chance (in the opinion of industry analysts) that it may reach a price of US$70 per barrel and thus create a good opportunity for investors seeking a good return on investment.

This week, the Organization of the Petroleum Exporting Countries (OPEC) and other non-member countries will be having a meeting in Vienna in which they will potentially discuss freezing oil output. Oil prices could witness an increase if an output freeze is agreed upon.

Alternatively, oil prices and perhaps more importantly, analysts’ outlooks, will remain on either side of the court if nothing results from the meeting.

Alexander Schiff, Private Wealth Associate- Client Services?? at Stocks and Securities Ltd.