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Is The Oil Market Set to Crash?

The price of a barrel of oil is vitally important. From individual consumers filling up their car through to the whole economic strength of countries in the Middle East, it is one of those metrics that matters.

The story of recent times has been one of turbulence. A barrel of oil grew steadily in value to 2010/11 and then maintained an above-$100 price for about four years, so much so that some thought this would be the new norm. Yet, that wasn’t to be. From the summer of 2014 the price plummeted, sinking to about $27 a barrel.

That huge crash was sparked by a number of factors – including oversupply, falling demand, a deal struck with Iran to reduce Western sanctions and an end to the ‘Arab Spring’ period.

Since then, however, prices have risen back to about $54. While that’s double the mid-crash low, it’s also about half the peak price. So, have we reached a ‘meet in the middle’ compromise, or could the price face a dramatic rise or fall again? Should those engaged in commodities trading expect a quiet year or more upheaval?

Controlling the supply

The last crash was largely abated by an agreement with the 13 members of the Organization of the Petroleum Exporting Countries (OPEC) and 11 non-OPEC countries cutting production for six months. Controlling the supply ‘glut’ has been important to avoid flooding the market.

Yet the United States doesn’t subscribe to such a deal, and fears have been raised that US crude inventories have created a glut in gasoline that is at its worst level in 27 years.

For now, that alone should not crash the market, but it has caused concerns, and has cut the predicted year-end cost of a barrel.

Demand

Yet, if on top of a fragile market there was a nosedive in demand, then a crash really could occur. But what could be the source of that drop in demand? One prediction is that this could be the fallout of a greater use of electric vehicles. If these were to become more widely used – something made possible by falling costs, better performance and the greater availability of charging points – then the demand for fuel would drop to an extent that oil prices would have to follow the path of 2014.

Yet, as Tim Worstall points out, the speed at which this may occur has probably been exaggerated.

Political instability

Political events loom in the background as another possible factor. If 2016 has taught us anything then it’s to expect the unexpected. The Arab Spring helped to drive up oil prices, who knows what impact the new President of the United States will have? Will ‘Trumpflation’ be a real, long-term phenomenon that impacts the global financial markets? Then there’s the election in Holland, France and Germany in 2017. These have the potential to disrupt the economy of the EU and harm demand.

Predictions in this uncertain world are brave at best. Yet, bearing that in mind, it would appear that the market isn’t yet on the brink of a fully blown crash. Forecasters seem to think the price will hold roughly in the same place in 2017. However, high levels of stock coupled with the real threat of electric vehicles and the possible threat of political disruption mean that this is a fragile situation and no-one should be surprised to see things change – least alone smart traders with their finger on the pulse.