Oil tumbled more than two per cent yesterday, edging perilously close to an 11-year low despite growing fears of World War Three kicking off between Saudi Arabia and Iran.
You’d think that the risk of disrupting supply from two of the world’s largest producers would rattle traders, but no! Late last night you could buy a barrel of brent crude for a little over $36 (£25) – small change compared to the $115 highs of Summer 2014. Prices had trickled down to an 11-year low of $35.98 just before Christmas.
I’ve been bear-ish on oil for quite some time now despite some spikes throughout the year and I still think it could drop to $20 a barrel. But increasingly the market consensus appears to be that oil will rise in the medium term.
The typical view from people I speak to is that Opec (for which read Saudi) will keep production high, which will keep prices low by creating a supply glut. This in turn will cause other producers (for which read the US) to cut their output as they can’t make a profit and eventually this will push prices up as there will be less oil around to meet the demand.
I think this is a far too simplistic a theory.
Firstly, I think the decrease in production, namely from the US, would have to be incredibly dramatic and it would take quite some time to show up due to their mammoth stockpiles of oil. This would be a long term not a medium term effect – and would only work this way if there are no other mitigating factors. I wonder if the hand of government would come into play if the mighty US lost its booming shale industry that was turning it from a net importer to a net exporter of energy?
Secondly, this theory only works if demand stays the same. And here lies the unknown. With growth in China – the world’s largest consumer of commodities – having slipped back into second gear, will there be enough demand to keep oil prices high? The market volatility in China this week shows that no-one really has the faintest idea about what’s going to happen.
Meanwhile in the West, increased energy efficiency measures and investment in renewable power sources mean that oil isn’t the master of the energy market that it once was. There are even predictions that the West’s energy consumption will decrease by the 2030s.
Why does everyone assume that oil prices must, and will, stabilise at a higher price? Surely a lower price could eventually become the new normal and economies would have to adapt or die as a result?
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Happy New Year to you all!