Around 4 months ago, crude oil price was at about USD140 per barrel. Fast forward to the last weekend, after a slew of bad news and poor earnings outlook hit the market, crude oil is only trading at about USD62 per barrel. After witnessing a drop of 55% in crude oil price, I have a few questions in my mind.
1) Did the oil consumption in the world reduce by half over the previous 4 months?
2) Did the world’s population replace half its energy needs by using alternative sources over the last 4 months?
3) Did the oil producing countries extract 2 times more output in the past 4 months?
4) Did someone or some country release its huge oil inventory in the market over the past 4 months?
The answer to the above 4 questions is a resounding ‘NO’. However, I will be glad if some kind soul can show me otherwise. The only logical and possible answer as to why oil prices has dropped dramatically is that most investors speculating in oil have exited the market. They include individuals, hedge funds and institutions. As such, this ties back to the title of my posting that the oil price in the market we have seen over the last few years is all rubbish. For the past few years, oil price is on a steady ascend because it is heavily influenced by speculators. Sadly during this period, there are even some highly respected persons who came out to defend the high oil price, saying that the prices are backed by real demand. When the commodities bubble burst, all of them tried to rush for the one and only exit, which results in the oil price collapsing in a relatively short period of time.
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2 comments:
I don't think a 50% drop in demand will cause a 50% drop in price. Conversely, a 50% drop in price doesn't mean that the demand has to drop 50% or that the supply has to double.
The assumption of a 1:1 correlation between supply/demand/price is inaccurate.
For example, if the price of 1kg of soy bean is $1 and let say the cost of producing it is $0.8/kg. When the demand drop by 50%, the price would probably stay below the $0.8/kg for a while to deplete the existing stock before the farmers stop selling them at a loss. They simply stop producing them or reduce the production. Supply reduced to match demand and prices stay about the cost of $0.8/kg
Hi cif5000,
Agree that a 1:1 correlation is inaccurate. The supply and demand graph is not a linear straight line. Both are curves. Nevertheless, it took about 1.5 years for the oil price to go from about USD50 to USD140. All it took was 4 months to go down to USD62. The dots simply do not connect.
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