Why wouldn’t oil prices return to their long-term average around $30/bbl? After all, the world is facing a long-term energy supply glut. The latest monthly report from the International Energy Agency (IEA) confirms my view that the recent rally has simply been a trading coup:
“Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations. Output estimates for 4Q14 North American supply have been revised upwards by a steep 300 kb/d.
The projection of 1Q15 supply has also been raised. Plunging US crude throughputs – due to seasonal and unplanned refinery outages, as well as weak margins and high gasoline stock builds in December – have seen US crude inventories soar, compounding the impact of robust supply growth. At last count, total US crude stocks stood at 468 mb, an all-time record.”
The chart above highlights the key issue. It shows oil prices in dollars of the day, and $2015, since oil was first commercialised in 1861:
- They were very high in the first 20 years, and volatile, as exploration and refining were very new
- Then they settled down into a sustainable range around $20/bbl until the mid-1970s
- The arrival of the BabyBoomers in the 25 – 54 Wealth Creator cohort caused demand to surge
- OPEC took advantage of this to boost prices back to their mid-19th century level
- But this proved only temporary, and prices fell back again to normal levels in 1985
Why should central banks prove any more successful than OPEC in keeping asset and commodity prices high? That is really the question. They can create temporary once-off wealth effects by adding debt. But once the wealth has been spent, it has gone. Only rising incomes can create sustainable new demand.
As the IEA notes, data on falling rig counts is irrelevant to current prices. Instead, we need to focus on what is actually happening on the ground in terms of the fundamentals of supply and demand.
The central banks’ misguided stimulus policies have destroyed price discovery mechanisms in many major markets. But now, as I have argued since August, the Great Unwinding of these policies is well underway. The oil price is falling again, and the dollar is rising sharply. And as the IEA suggests, this is not going to be an easy ride.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 52%. “Sentiment remains sluggish amid continued length in the region”
Brent crude oil, down 48%
Naphtha Europe, down 43%. “Prices have fallen on the back of a decline in upstream Brent crude oil futures”
PTA China, down 38%. “Huge inventories in the key China markets had led many market participants to hold a bearish market outlook”
HDPE US export, down 23%. “Export prices edged up on a few grades this week following increases in Europe and Asia”
¥:$, down 19%
S&P 500 stock market index, up 5%