PARIS (
ResourceInvestor.com) -- We were wrong. It is not something you will hear much from the financial markets. Not something you will hear much from the bankers who assured everyone that rampant deregulation was a good idea. Not something you will hear from the politicians who told us how great ‘growth’ and ‘globalization’ were. But from this column, we were wrong.
The strength of the banking crisis pulled oil as low as $89 per barrel, way below what we expected – a range with a floor at around $110 per barrel. The depth of economic gloom and forecasts of calamity bludgeoned commodities and sucked oil back to territories few thought possible.
Now for our defence. We did say that only recessionary fears could possibly break us down below $100 per barrel. And they did. We also said the market had turned like a herd away from the fundamentals and towards outright fear, this was also correct.
So here is a caveat. We are not going to sit here and predict the levels that the recession will reach. Like everyone else, we simply have no way of knowing. But the fall in oil prices is extremely worrying on two counts. Firstly if the market is correct on the strength of the recession then oil could fall further than $90 per barrel. If oil falls below $90 per barrel and keeps going it is going to throw the expansion plans of the explorers into heaps of trouble.
Projects such as oil sands, tar, shale and deep water projects such as the Santos basin offshore Brazil will suddenly look a lot less attractive to develop. But the drive from emerging economies to consume more energy looks unlikely to go away. Widespread demand transference from richer OECD economies to China and India – where price elasticity is less of an issue – seems unlikely to stop.
It could slow, but stopping is unlikely. The only way Chinese and Indian demand will slow is if we get a recession the size of which no one can plan for. But even if only to serve internal demand the Chinese state run economy – now so much more similar to the bail-out capital of the world, the U.S. – looks likely to continue boosting demand.
So we could see oil sitting in an uncomfortable range, let us say around $70 per barrel, where the majors plans are thrown into flux, having been budgeted for at higher price assumptions. This could create some uncomfortable stagnation, both in terms of the speed of project execution, new supplies coming on stream and so on.
Eventually the market will see price rebounds and supply lines become taught once more, but in the face of a possible long term economic slowdown this is very difficult to bear.
What we see as more likely is that oil will not fall that far. Right now the market is ignoring the impending possible collapse of the Nigerian oil industry, tens of destroyed rigs in the Gulf of Mexico and increasing tensions once more with Iran. Let alone the fall out from the conflict between Georgia’s neo-conservative government and the criminals in the Kremlin.
Instead we could see upside risks, price shocks that come from the market suddenly realising the fundamentals have not gone away. We were wrong in that we predicted a floor of $110, but despite all the pessimism $100 per barrel is not so impossible. Oil is not going to stop being needed over night and do not be surprised to see oil breaching the $100 mark again very soon.
Either way the effect on the global economy of collapsing oil prices, or ones that stick at around $100 per barrel are uncomfortable. Too low and new output stalls, too high and we have a stagflationary recession. If only us ordinary Joe’s could get bailed out like the bankers who created this mess…
