A word of caution first. I am not an oil expert, but perhaps am one of the readers, who developed an interest in the subject.
As we enter 2016, the one question that dominates everyone’s mind is, “Where will the free fall of crude oil price stop before moving upwards?” During the last 18 months, prices have slipped by almost 70 per cent to $37 per barrel, and the downhill journey appears to be unrelenting.
Historically, the highest oil price was reported in July 2008, when it touched $145. If one looks at the last seven decades since 1946, the average oil price has been $42.
A further analysis shows that the average price was $53 during 1980 to 2015 and $65 during the 2000 to 2015 period. Going by this trend, it would be fair to assume that in the near term, prices may be projected to hover anywhere between $50 and $65.
But it is not that easy. During the past, oil prices have fluctuated like the human blood pressure. Prices are determined by market forces of demand and supply and in the case of oil; both are inflexible in the short-term. Therefore, oil prices vary as it happens in vegetable market.
For instance, oil prices, which peaked to $145 in July 2008 fell to $30 in December 2008, which reflected an almost 80 per cent drop in five months. A series of events, which took place simultaneously, triggered the rise and fall, which no one had anticipated.
That is why predicting oil prices is like playing in Las Vegas—you will end up losing all the time.
Let’s consider why pessimists cannot be wrong. If we look at the near-term, the world economy is slowing down. The International Monetary Fund’s Chief has warned that global economic growth in 2016 might be disappointing.
China’s period of double digit growth no longer exists. Economic concerns exist in Japan and Europe. Global trade is decelerating. India’s banking sector is bleeding with non-performing assets, even as there are worries of further deterioration due to the dollar’s appreciation and prospects of corporate default.
Added to this is the glut in oil supply following the decision of Organisation of the Petroleum Exporting Countries (OPEC) to continue pumping more oil, an increase in production in the non-OPEC region and the expected addition of Iran’s oil to the global market.
Apparently, in the near term, the pressure on the downward side is relatively higher with no visible signs on the upside. Since 2008, attempts of global economists to revive growth have not yielded significant results.
Does that mean there is no scope for optimism? Naseem Nicholas Taleeb, famously known for his thoughts on randomness, has argued on how human minds are incapable of predicting ‘Black Swan’ events.
We can’t rule out such ‘BlackSwan,’ events which can swing the price to the higher side. For instance, a sudden geopolitical crisis or a change of decision by OPEC to pursue revenue instead of market share can push the prices higher. In the medium term, if global growth revives, companies will need more energy to keep their engines running.
My guess is that the worst may be over because I choose to be an optimist. - Exclusive to Times of Oman