Oil markets risk rapid repricing – Part 1

Futures trading, Oil markets

Brent May13.pngSince 1900, as the chart shows, oil prices have never been so high for so long as now. Until 2003, they had only been above $30/bbl for 4 years between 1979-1982, during the OPEC production cuts in the Iran crisis. But since 2004, they have been continuously above this level.

The reason is the misguided stimulus policies of western central banks, which aimed:

• Firstly to support US/European housing markets until the sub-prime lending crisis of 2008
• Secondly to enable a speedy return to full economic recovery since then

The 2004-8 period boosted consumer demand well beyond sustainable levels, causing inflation to rise quite dramatically. Thus when the second stimulus programme began in March 2009, investors were well prepared. They rushed to buy ‘stores of value‘ – commodities such as oil, copper and gold, all priced in US$ – as well as equities. They also worried that the US Federal Reserve aimed to devalue the US$ to boost US exports and economic gtrowth.

Unfortunately for all of us, this pushed oil prices back up to unsustainable levels again. But this time, due to the financial crisis, there was no demand surge. Instead, as credit was no longer easily available, people had to cut back spending. They had to heat their homes and fuel their cars, so they had less to spend on the areas that would drive demand growth.

The result has been two-fold:

Supply has leapt. 10 years is long enough for most oil companies to ‘forget’ previous history, and to invest in new output on the basis that $100/bbl prices are now ‘normal’
• Thus US oil production has reached 7mbd, a 20-year high, and is still increasing. Other sources are also booming, whilst shale gas is gaining major market share
Demand growth has been weak. Prices in US$ were at record annual levels in 2011-12. In other major regions such as Europe and China they have been at all-time record levels
Inventories are at record levels in many parts of the world. In the US, for example, they reached an 82-year high last week

Normally high inventories, increasing supply and low demand growth would not lead to record high price levels. But these have not been ‘normal’ times. Tomorrow, the blog will discuss the risk that oil prices might now fall rapidly back to historical levels below $30/bbl.

The blog is today publishing a Research Note on this critical question. Please click here to download it. A video interview with Will Beacham, deputy editor of ICIS Chemical Business, is also available by clicking here.


Central banks pop champagne corks as stock markets soar


Central bankers mean well. But, of course, good intentions do not guarantee good...

Learn more

Oil markets risk rapid repricing - Part 2


As the blog discussed yesterday, central banks have now kept oil prices above th...

Learn more
More posts
Recession risk rises as Iran tensions and US-China trade war build

Oil markets are once again uneasily balanced between two completely different outcomes – and o...

Déjà vu all over again for oil markets as recession risks rise

Back in 2015, veteran Saudi Oil Minister Ali  Naimi was very clear about Saudi’s need to adop...

Oil prices flag recession risk as Iranian geopolitical tensions rise

Today, we have “lies, fake news and statistics” rather than the old phrase “lies, ...

Saudi oil policy risks creating perfect storm for Aramco flotation

Good business strategies generally create good investments over the longer term. And so Aramco need...

Economy faces slowdown as oil/commodity prices slide

Oil and commodity markets long ago lost contact with the real world of supply and demand. Instead, t...

Saudi Arabia’s ‘Vision 2030’ is looking a lot less clear

Saudi Arabia’s U-turn to revive oil output quotas is not working and fails to address the chan...

Oil market supply/demand finally begins to matter again as commodity funds withdraw

Its been a long time since oil market supply/demand was based on physical barrels rather than financ...

Oil heads back below $30/bbl as hedge funds give up on OPEC

“Those who cannot remember the past are condemned to repeat it“. George Santayana 9 mont...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more