Dec 2, 2011|
Predicting Crude Oil Prices
Indian investors' are often interested where the overall economy is going, and as an indicator, they ask about the direction of crude oil prices. Before speculating on the future, it is instructive to understand how crude oil prices have behaved in the past.
A Perspective on Historical Crude Oil Prices
Pre 1970s: During the mid twentieth century, while new applications for oil were being discovered, the demand for oil was small relative to the large supply available. Until 1950, the price for crude oil was in the range of $5 to $10 per barrel. Given these relatively low oil prices, nations with rich crude oil reserves (e.g. Middle East) could not exert much power on global prices.
However, between 1950 and 1970, there was a significant increase in demand. This along with the supply shocks led to a dramatic increase in prices. Demand for industrial oil spiked up due to World War II and the Arab-Israeli war. On the supply side, attempts to nationalize oil assets by some Middle Eastern countries, and the creation of OPEC contributed to the supply side constraints. During these twenty years, the price of crude oil grew nearly five-fold to $48 per barrel in 1970.
Between 1970 and 2008: With massive global industrialization, the demand for oil rose even more significantly. This period marked the shift of bargaining power from the buyers' to the suppliers. By then, most of the Middle Eastern countries had nationalized their oil related assets. Previously these assets had been assigned to International Oil Companies (IOC). While oil production in the US also increased, it peaked. Clearly the power had shifted to Middle Ease National Oil Companies (NOCs).
Till 2008, oil prices rose every year with a few exceptions. Per barrel crude oil prices increased from $63 per barrel in 1980, to $77 per barrel in 2003, and peaked at $150 in 2008. One notable exception was in 1998, when the price fell for a brief period due to the Asian crisis. However, the Iraq War in 2003, and strong demand from emerging markets such as China and India continued the upward price momentum. At the same time, the new discoveries were slowing and the cost of production also increased.
However, after the financial market bubble burst in 2008 and large financial institutions collapsed, the unjustifiable peak price of $150 per barrel cracked.
Post 2008: After the global financial crisis and corresponding recessionary fears and liquidity crunch, the oil price touched a low of $33 per barrel, and then stabilized near $70. Since then it has increased slowly and is hovering near the $100 per barrel mark in 2011.
So, while oil prices increased form the 1950s to a high of $ 150 per barrel in 1980, they dropped to a low of $33 per barrel, and now is around $ 100 per barrel.
This peek into how oil prices have historically behaved tells us that it is nearly impossible to predict volatile oil prices. Philosopher, Lao Tzu's words to a great extent summarizes the attempt to predict oil prices. "Those who have knowledge don't predict. Those who predict, don't have knowledge"
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Aug 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
Aug 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407