Written By: Sophie Davidson
At one point on January 7, both U.S. Light Crude (WTI) and European Light Crude (Brent) were trading below $50 per barrel.
WTI hit $47 early in the morning after passing the $50 mark on the previous day. Brent briefly dipped below $50 at around the same time. Both then rallied, with the markets unwilling to let oil slide too far. Investors that were commodity trading in Australia were allowed some brief relief when WTI returned to $49 and Brent $51.
The positive regard for these prices is a stark reminder of how far oil’s stock has fallen. In July, U.S. oil was still trading above $100, before making its first serious move south at the end of the month. Brent held out for another month, beginning September with the $100 mark still intact.
From October onwards, oil had a torrid time. In three dramatic months, both European and U.S. oil slid almost 40%. That put them at levels unseen since the financial crash. From October 1 to December 30, Brent Crude lost 39% of its value; over the same period the Russian rouble – a ‘crisis’ currency against the dollar – lost only 3% more. Bitcoin, decried as the worst investment of 2014 in many quarters and lost 15%.
Perhaps even more worryingly, there are several signs that the rally may provide only temporary respite. Certainly, the cause for oil’s tumbling price has not gone away. As long as the USA continues supplementing its own supply by fracking for shale gas and China’s growth remains slower than expected, global demand for oil will remain depressed.
On the supply side, Opec nations have been unwilling to reach any agreement to reduce production in an attempt to redress the balance.
Ali Naimi, the Saudi Oil Minister, spoke out recently about his country’s oil production, stating that the $100 per barrel level may never be seen again and that Opec has no intention of reducing production: even if the value of oil halves once more.
In the short term, that means that lows of $49 for Brent and $46 for WTI are likely to be tested once more. Further ahead, things get tough to predict. A few months ago, even negative articles concerning oil’s price in 2015 were talking of $80 averages. Now predictions range from $10 to $100. Much rests on China’s economy, the actions of major oil companies and the markets themselves.
So what effect does this have on the consumer? In theory, for those of us in Europe, the picture should be rosy. Economists predict that GDP in oil-consuming economies should receive a 0.75% boost from lower oil prices, as businesses save thousands on energy and petrol. However, for consumers to truly benefit, governments need to ensure that businesses pass on savings, with lower flights, energy bills and car travel.
In truth, the picture is more complicated. By lowering prices across several sectors, a faltering oil price may only worsen Europe’s deflation problem. The usual solution to such a problem is lowering interest rates, which is no longer an option.
So whilst consumers may be celebrating the discount to their weekly shop, those in charge of Europe’s economy have yet another headscratching problem on their hands. This information has been prepared by IG, a trading name of IG Markets Limited.