Early oil price recovery not likely

The oil price jumped up a little last week on hopes that the G20 summit’s $5 billion reflationary support might encourage an early economic recovery and higher inflation.

However, the unprecedented slide into a global economic contraction on a scale not seen for 70 years ought to put this wishful thinking into some perspective. Last year global asset values fell by $50 trillion, making $5 trillion a drop in the ocean.

Recovery takes time

Also if we look at oil price charts for previous price spikes and slumps then a long recovery period of at least several years is noted. It is hardly likely to be different this time. Indeed in view of the severity of the global business slump the depression of oil prices ought to last longer than average, not be quicker to recover.

You also have to wonder if the bottom has been reached for the oil price in this down leg. It touched $33 but $24 a barrel is the long term average, and oil prices have always corrected below this average.

That might leave those speculators that have been buying and holding oil in tankers with a loss later in the year. If nothing else they are guaranteeing an over-supply position by holding such stocks.

It stands to reason that as the global economic recession worsens, even if it is heading towards a bottom, then demand for oil will fall. And in a de-leveraging environment it is a tough call as to when that demand might return.

Supply rising

Oil producer countries are slashing expansion projects but there is more capacity set to come online over the next couple of years. It will only be four or five years down the road that the pull back in investment begins to tip the supply and demand balance.

On the whole, if previous patterns of oil price crashes are followed then prices could hit a new low this summer, and then take several years to stage a very modest recovery. A real price spike like the one seen last July is five to 10 years away.

Businesses in the Middle East ought to be factoring this into their calculations because a lower oil price will impact on every sector eventually, and market forces have a will of their own that no government can command.
Order online from this link