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Here’s What Will Send Oil Prices Back Up Again

Here’s What Will Send Oil Prices Back Up Again

Oil’s rapid decline since August of last year has been dramatic. To listen to some commentators you would also think it is unprecedented and irreversible. Those claiming that oil will continue to fall from here and remain low for evermore, however, are flying in the face of both history and common sense. The question we should be asking ourselves is not if oil prices will recover, but when they will.

WTISinceJan85

Figure 1: Inflation adjusted WTI since Jan 1985. Chart from Macrotrends.net

From June of 2014 until now, the price of a barrel of West Texas Intermediate (WTI) crude oil has fallen approximately 57 percent. As the above chart shows, there have been drops of a similar percentage five times in the last 30 years. The rate of recovery has been different each time, but recovery has come. In addition, since 1999 the chart shows a consistent pattern of higher lows. In other words, oil is a volatile market, but prices are in a long term upward trend.

Related: How Much Crude Oil Do You Consume On A Daily Basis?

Charts can only tell us so much, however. Even a long term trend can be broken if fundamental conditions change, and that, say those predicting that oil will never recover, is what has happened. There is no doubt that supply has increased. Hydraulic fracturing, or “fracking” technology has unlocked reserves of oil and natural gas previously thought of as unrecoverable. Supply alone, however, doesn’t determine price. We must also consider demand, and that has been increasing too.

WorldLiquidFuelsProduction

According to this chart, from the U.S. Energy Information Agency (EIA), demand has been increasing along with supply since 2010. Admittedly there has been a production surplus since the beginning of 2014 but that is nothing new and is forecast to be back in balance by the end of this year. The increased production, then, is in response to increasing demand; hardly a recipe for a protracted period of low prices. The supply situation makes it unlikely that the recovery will be rapid, but a gradual move up over the next few years is the only logical conclusion.

The low price brigade cites another factor in making their predictions, the rise of alternative energy sources. There is no doubt that there have been significant advances in that area, particularly in wind and solar power, but, according to the EIA, renewables currently account for 11 percent of the world’s energy consumption. That number will undoubtedly grow in the coming years, but, whether we like it or not, oil consumption still looks set to grow over the next few years. Fracking can fill some of that demand, but the simple fact remains that oil is still used extensively, and we are using more of it every year. The price simply cannot stay low for an extended period, but while it does it will delay research and infrastructure spending on renewables, slowing the pace of their adoption.

Related: OPEC Considers Emergency Meeting On Oil Prices

Any increase in price would be hastened by a decision from OPEC and Saudi Arabia in particular, to reduce production. Right now they say that that is not on the cards, and why would they cut back? Their attitude seems to be that the oversupply was not their doing, and as their oil is cheap to produce, they can sit back and watch those who did cause the problem, most notably the upstart American companies, suffer. OPEC has always played the long game and will undoubtedly do so again, but once the lesson has been taught the pressure to restrict supply somewhat will mount. Again it may take time, but it will probably come.

History tells us that the price of oil will bounce back, but so does basic logic. Oil is a finite resource that we are using at an increasing rate, and as long as that situation remains, the laws of supply and demand mean that the price must recover. That is a good thing. As long as oil remains cheap there is little incentive to invest in the alternatives that we will inevitably need someday, nor to reduce our consumption of what is essentially a dirty fuel source. So, enjoy low fuel prices while you can, but don’t expect them to last forever.

By Martin Tillier of Oilprice.com

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  • Oilracle on March 02 2015 said:
    Here’s What Will NOT Send Oil Prices Back Up Again: Fear of the Big Banks that the ever increasing printed Dollar will collapse too quickly.
    The Big Banks cannot invest in the Middle East and must print Dollars for US to buy oil from there, but they could invest and profit from domestic oil production.
  • R. L. Hails Sr. P. E. (ret.) on March 02 2015 said:
    The price of crude is not controlled by the laws of supply and demand. The price is controlled by market share in an oligopoly. Hence any rational process, this time last year, would not have projected a 50% price drop in the world market. The price may go up or down based solely on the private thoughts of a very few private parties. Any equilibrium price means they are reasonably happy today. Those who are responsible for the future well being or their organization must consider this fact of life.
  • chartreader on March 02 2015 said:
    Interesting I agree that you need to know that historical data. But I come to a total different conclusion. The graph shows that the inflation adjusted price is about 45-55 per barrel. And in the last 12 years 2 big bubbles occurred. These bubbles are not the norm. So the current drop in price is a return to the real value. Bubbles may occur in the future but they will be exactly that, not a return to normalcy.
  • vns990 on March 04 2015 said:
    I tend to agree with all points raised but.

    Numerous things are known and stating the obvious.

    Supply and demand is the name of the game.


    Consumption unlike what they say in the media is not going down.

    The worlds hunger for hydrocarbons grows daily and the big cats know that.

    If they hold out there's a good reason for it.

    If they flood the market there's an even better reason for it.

    But there is one thing you can bank on and I tend to go with the way way up she rises camp.

    Greed.

    The people in the big game want as much of it as possible as quick as possible.

    That of course being money.

    Your better of looking at the players in question and asking yourself Hmmm what does this years fiscal budget for them entail ;-)

    If theories already discussed are correct I think this would be directionally proportionate.

    Fuel everyday is being burnt and some one mostly everyone is paying for that I tend to go old school in that sense and say don't forget peak oil.

    Based on recent trends and other factors just inflation in general.

    It's really a case of set your stop watches.
  • Jimmie on April 11 2015 said:
    Vns 990...you should consider taking a comp 101 class at your local community college. Your comment was a very difficult read. I am not going to detail all of rhe composition and grammar mistakes, as there are, quite frankly, just too many. In order to make an effective argument, one must be proficient in the art of communication.

    As to the price of oil...I am currently holding thousands of shares in energy companies that I bought during this downturn...I am patiently awaiting the fortune that I shall amass when crude oil prices rise, as they will inevitably do.

    If supply and demand arent the cause to a return in higher price, it will be geo-political unrest, war, or a production cut by the Saudi's...but rest assured, prices will go back up.
  • Joe Garcia on April 15 2015 said:
    Black Gold Will Go Up!
  • James Huggins on May 06 2015 said:
    Nobody benefits from high gas prices, but big oil companies. There has always been an abundance of oil and will be for a long, long time . There has never been a REAL shortage of gas. Big oil knows that they can get away with keeping the market confused and in turmoil. They are buying wells and closing them down to drive prices up. These artificial high prices hurt the worlds economies and the standard of living forevery working person.

    Shale oil will return to save the world from runaway prices driven by Big Oil, unless big oil gains control of them. Oil companies are hurting everyone with no remorse.
  • Dave on November 30 2015 said:
    James. You said nobody benefits from high oil prices. Your wrong. Thousands and thousands of jobs are lost because of oil being so low. I Know this because I am in th e industry.so now you have a lot of unemployment . Who's paying that? Not the tax dollars of those who lost there jobs. There has to be a happy medium.

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