Oil Price Collapse: I Can Buy A Gas-Guzzler, Right? Photo:

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Tim O'Brien | Jan, 20 2015 | 13 Comments

When it comes to predictions on oil, nearly everyone is wrong most of the time. Put us in there; four months ago I wrote about “irrational complacency in the market”.

“In a market so heavily traded on futures, as is the global oil market, uncertainty can send a market into an upward gallop as readily as it can send traders rushing to the lifeboats,” I warned.

That seemed a sensible position at the time. It was, and is.

Then the market, already in a tailspin, collapsed.

But if you’re thinking of buying a car right now, can you rely on ‘cheap oil’, and, ipso facto, cheap petrol and diesel, for the next few years?

Well, no. As we also warned in September - and we got this bit right - the price of oil can turn on a nail.

As it did in 2007.

Then, the global benchmark light sweet North Sea crude, Brent Crude, went from US$55 a barrel at the beginning of that year, to US$95 in December, and by July 2008 it had risen to a high of US$145.85 a barrel.

Above: click to view full chart.
Above: click to view full chart.

Do you remember that? You may also recall the dire tabloid warnings of pump prices at $2.00 a litre “by the end of the year”? Or has the memory receded with the pain?

You may not also remember that it then crashed even more spectacularly then today’s oil market crash.

That’s also there in the graph above: from the high of USD$145 a barrel in July, by December it had crashed and burned to USD$32. (Of course, it was assisted in its slide by a little unpleasantness surrounding a certain Wall Street investment-banking house called Lehman Bros.)

Ok, fast-forward seven years. For most of those years, Brent has chugged along at around USD$110 a barrel, plus or minus ten percent.

Back in September, Brent Crude was trading at USD$103 a barrel. Then it went into the latest freefall - and halved in five months.

It’s now at USD$47.67 - but wait a few minutes and it will have moved some more (mid-last week, it rallied 4.0 percent, then dropped again, completely wiping out the gain).

The current barrel price takes the market back to those 2009 levels, to that apocalyptic time immediately following the Lehmann Bros crash and the onset of the GFC.

Look again at the five year graph above charting the price of oil; it looks like the person drawing the graph suddenly died, and the line has followed him to the floor.

Now while there is joy for motorists in a collapsing oil price, they would be most unwise to consider this a state of permanence.

As quickly as it has collapsed, the most heavily traded - and manipulated - commodity on the planet, can bolt skyward.

And it won’t take much to trigger it.

But, for now, some analysts, like Bank of America Merrill Lynch, and they will probably be wrong, are forecasting that Brent Crude will fall to as low as $32 a barrel by the end of Q1 2015.

However, it’s the forces at play in this collapsing market, and the tensions driving them, that make the current situation so volatile and, ultimately, so uncertain as to the medium term outlook.

In other words, don’t bank on oil, and petrol prices, staying at the current lows. Look at any graph charting the historical fortunes of oil and there is only one direction for it to go from here.

And when oil does return to its natural resting place (which will be somewhere above USD$80 a barrel, because anything less is unsustainable in the longer term for North American Shale Oil producers), there will not be the protection of a high Aussie dollar to soften the blow at the pump.

If you are buying a new car right now, and factoring in the ownership costs, you are best advised to err on the side of caution as far as the pump is concerned.

NEXT: We will look at two factors sitting a little distant to the current situation - this mighty arm wrestle going on between a diminished OPEC, Saudi Arabia in the main, and non-OPEC producers - and the ominous historical precedent cast by one of these factors.


Global Oil Market: Some Fast Facts

Global Oil Production 2014: 92.18 million BBL/D
Non-OPEC Oil Production 2014: 56.17 million barrels BBL/D
OPEC Oil Production 2014: 36.0 million barrels BBL/D
(Source: US Energy Information Administration)

1 Barrel of oil = 158.987295 litres (or 42 US gallons)
Brent Crude, North Sea Light Sweet Crude, is the International Oil benchmark
“Sweet” refers to its low sulphur content (considered best for making petrol and diesel)
West Texas Intermediate (WTI) is a US benchmark

(Photo credit, top of article: Hourann Bosci, Flickr.)

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