Everything over the last few months seems to have been attributed to the price of oil – which has been blamed for stockmarkets, inflation, Russia causing problems and even Iran giving up enriching plutonium.
So what does the future look like for the black stuff? Prices may go lower but it appears countries are starting to get serious about cutting supply. Historically many countries are not very good at sticking to quotas, so the mindset here could be that we’ll believe it when we see it. It will be interesting to see how high oil prices rise, and given US shale oil will come back online as this happens, it is probably right to expect oil barrel prices to sit in the zone of the $40’s or $50’s. On the demand side, and with cheaper sources of energy constantly evolving, man’s ingenuity to develop technology will mean that the concept of peak oil (when the maximum rate of extraction of petroleum is reached) may never occur. It could be that countries who are sitting on what was a proverbial goldmine are now just a home for oil that fewer people need or want.
What does it mean for the investor though? From an inflation point of view the recent price reductions will stop their downward pressure on inflation through 2016, and the price at the pump will not change much because of taxes. In the high yield debt market there could be some upsets with the oil producers and suppliers – especially in the US with defaults rising. Furthermore, in equities the big oil majors have suffered and dividends could come under pressure. Fundamentally the winners are the non-oil producers and manufactures, transport, and all of us – the consumers – with cheaper petrol.
The other thing to consider is that because banks no longer have such large trading desks there may be less interference with the price mechanism and trading oil to the same extent.
On balance though, if we have cheaper oil it’s not a bad thing.