How low can oil go? In the short-term, it is anyone’s guess. But in the medium to long term, I suspect we’re close to a bottom.
Why?
Guest post by Jamie Coleman
Because the sources of new crude like hydraulic fracturing (fracking) now being used with great success in the US, and the Alberta tar sands in Canada become uneconomical at today’s prices. Production will necessarily be cut back and the supply-demand imbalance we are experiencing at present should come back into line.
So as production falls, prices should skyrocket again, right?
That seems pretty unlikely against the present sluggish global macro backdrop. Oil’s persistent strength over the summer months was fueled (pun intended) by the combination of geopolitical uncertainty and the perception that loose monetary policy would eventually revive inflation.
Recent months have shown that deflationary winds are blowing much more strongly than inflationary ones. Markets no longer fear stimulus. They are in fact, demanding it. The geopolitical backdrop remains as unsettled as ever, but supply disruptions seem a remote possibility near-term. With oil 40% below summer peaks, producers need to sell more to maintain their revenues.
$100 crude seems like a thing of the past, while $50 crude looks unlikely on a sustained basis as supply should begin to move offline soon. $70-$80 dollars seems like a reasonable range in the months ahead. Only when economic growth resumes will upside pressures return.
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