Saturday, January 17, 2015

I Told You So On Oil Prices

Yes, yes, eventually I shall be wrong.  But a week ago here I called a bottom to the oil price decline before anybody else in the world did, and it has held, with the price fluctuating between $44 per barrel and $51 per barrel. My post simply reminded the world what most of it had paid no attention to that the Saudis had publicly stated that they were planning their budget on the basis of a world oil price between $45 and $50 per barrel (minor note that Brent is about 75 cents above West Texas, a near convergence after a long period in which they were unaccustomably quite a few dollars apart)for .

So, in that post I declared "You saw it here first," and this is certainly the case.  Looks increasingly like the price is going to stay within the range that the Saudis want it to be for the near term.

In terms of details, for 8 hours a few days ago, the price went below $45, finally hitting bottom at $44, but after it rebounded it surged to $51, only to fall sharply.  The market seems for the moment to believe the Saudis, and the latest closing price was a bit over $48.  Deal with it and enjoy.

Barkley Rosser


Robin Johnson's Economics Web Page said...

Well done!
Anatole Kaletsky and Elias Hinckley say that the refusal of the Saudis to reduce production also their reflects their determination to ensure their reserves don't become stranded assets under a "carbon bubble" scenario.
Have you a view on that? said...

Thanks, Anatole,

Needless to say, I must admit that at any moment, possibly even as soon as this week, the price could go moving off up or down out of this range, and I shall then have egg on my face, even if I was right for about a week and a half.

However, a few reasons why we might stay either within this interval or not too far from it include: 1) The Saudis have publicly declared that they are not willing to cut their prodcution any more to keep higher cost producers in business as they did many times in the past, 2) Supply and demand both reapond fairly slowly to price changes, although we can see some responding already on the demand side to the lower price (soaring SUV sales in the US), 3) While demand is low now, thus possibly supporting a further fall in the price (and Saudi Oil Minister, al Naimi has said their production costs are $4-5 per barrel), the Saudis probably have the financial ability to intervene in the forward markets to halt at least speculative pressures to push the price lower (indeed, I think it is the case that they did just this to halt the price decline after it passed $50 per barrel).

However, if demand really does go down further, they might not be able to prevent a price decline below $45 (Goldman Sachs recently forecast a low of $40). And, if indeed lots of oil rigs shut soon in the US and demand rebounds, particularly if world economic growth does better than widely currently forecast by most, the price might on its own go back up above $50 (Russian bloggers are declaring the price will soar very shortly up over $70 or $80 where Russian economic prospects would not look quite as bad as they do now).

I ran into Jim Hamilton in the hallways at ASSA, and we agreed that nobody could really seriously forecast the near term trajectory of the price of oil, so I am out of line here and can easily be found to have been wrong.