At below $US60 a barrel this morning, the crude oil price has fallen 60% from its July peak and is now below where it started calendar 2007.
This time last year all the talk in the oil market was about the effect of hedge fund speculation. And when energy commentators weren’t talking about hedge funds, they were talking about China. The price of West Texas intermediate was then $US98, on its way to touching $US100 on 3 January, before peaking at $US147.08 on 11 July this year.
Now there is no talk of hedge funds; they have either gone or no one cares any more. The oil story in 2008-09 is all about underlying demand, and specifically the United States. This week’s China stimulus package barely registered on the oil price (or anything else for that matter).
At below $US60 a barrel this morning, the crude oil price has fallen 60% from its July peak and is now below where it started calendar 2007.
Benchmark crude oil traded between $US60 and $US70 a barrel for two years, between mid-2005 and mid-2007 before the hedge funds and the China bulls got hold of it in the middle of last year, and the Goldman Sachs analysts started taking about a “super spike” to $US200 a barrel.
However I can’t see any reason the 2005-07 trading range will simply be resumed, and that $US60 will represent a price floor as it did then.
China’s was growing at 11% a year then, and the US housing market was just peaking (in August 2006). The rise in sub-prime mortgage defaults was six months off and the beginning of the credit crisis 12 months away.
Last night the chief executive of Merrill Lynch, John Thain, told his firm’s annual financial services conference in New York that you had to look back to 1929 “to see the kind of slowdown we’re experiencing now. It is not like 1987, it is not like 1998, it is not like 2001.
“The US economy is contracting very rapidly,” he said, creating uncertainty “at least over the next few quarters. We are going to be in a very difficult economic environment for a significant period of time.”
That doesn’t sound like 2005-07 to me.
OPEC certainly won’t be able to hold the price at $US60 a barrel. In October the organisation cut production by 1.5 million barrels a day; last night the governor of OPEC, Mohammad Ali Khatabi, told Dow Jones: “If you can calculate the decline in world (oil) consumption, you arrive at a figure that’s higher than 1.5 million barrels a day. There is some indication that shows the market is still oversupplied.”
Oil has always acted as a sort of “automatic stabiliser” for the world economy, in the manner of Keynesian fiscal policy, and the tumbling price of crude, and therefore petrol, is certainly one of the few pieces of good news for consumers at the moment. Unlike falling interest rates, it benefits those who are debt-free (mostly retirees) as well as those who have a mortgage.
Well, this piece of good news seems likely persist; the oil price and – subject to the exchange rate – Australian petrol prices should keep falling in the months ahead.
OPEC is behind the curve as its governor has admitted, and the energy demand picture in both the US and China looks set to weaken further.
This article first appeared in Business Spectator
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