Oil prices took a 2% dive Monday, worse off than the Dow Jones, which ended the trading session down 0.36% as well. The international benchmark for global oil prices is North Sea Brent Crude, “a blended light sweet crude oil recovered from the North Sea in the early 1960s.”
“Brent crude oil has relatively low sulfur content and a relatively high gravity on the American Petroleum Institute’s standard scale.” The low sulfur content is why Brent crude is called “sweet,” and its high gravity (or low density– free flowing at room temperature) is why it’s called “light.”
To use an analogy to precious metals:
If someone quotes you the spot price of gold or silver, which is the current price for a gold or silver transaction right now, they are quoting it based on a certain grade of purity for these metals. For gold it’s 1 troy ounce (approx. 31.1 grams) of 24K gold. For silver it’s 1 troy ounce of .999 fine silver. Well when someone quotes you the spot price of oil, they’re quoting you the current price of a barrel of North Sea Brent sweet light crude oil.
And “a barrel” is 42 U.S. liquid gallons or 159 liters of oil.
Well the spot price of Brent crude took a dive Monday, which has had people asking “Why?” and prompted speculation (on CNBC for instance) that decreased Chinese imports and exports, which fell by the most in two years in December, may be partly to blame for the losses.
But with oil prices, as well as with cryptocurrency prices, it’s good to step back, zoom out, and get the big picture so we have a backdrop against which to understand the events of the week, month, or year with respect to a particular commodity’s price and prospects. In this case oil.
Here’s the spot price of crude oil over the last 70 years going back to the year 1950:
The astute observer will notice that there are three very significant spikes in the crude oil spot price during three recessions (indicated in gray) over the last 50 years, which may lead one to ask: Is there some kind of inverse correlation between oil prices and equities valuations?
The conventional financial models have held that, all other things being equal, there is in fact an inverse correlation between oil prices and stock price:
“The underlying assumption adopted by this view is that when oil prices rise, energy prices rise as a whole. This causes systemic inflation, increasing the sunk costs absorbed by companies during the execution of everyday business operations.
In turn, profitability is hurt. As a result, traders and investors are prompted to sell off corporate stock and drive share price down.”
But the complexity of factors involved have led the proposed link between the two asset classes to be scrutinized for years, and a number of studies by the International Monetary Fund (IMF), the Bank Of International Settlements (BIS), the U.S. Energy Information Administration (EIA), the U.S. Federal Reserve (FED), and Forbes Magazine have examined the topic extensively.
With the conclusions: No and maybe.
“Almost all of the pumps shown on this picture were busy when I took the picture.” –Arne Hückelheim
Well no one can say for sure, but we can certainly approach the question by asking what will most likely be major factors affecting the price of crude oil over the next 70 years?
Well one of the most obvious factors is that U.S. oil production is at an all time high:
“U.S. crude oil output hit an all-time high of more than 11.5 million barrels per day in October, according to government data released on Monday.”
Russian crude oil production is at an all time high as well:
“The country’s crude and condensate output averaged 11.412 million barrels per day last month, according to data from the Energy Ministry’s CDU-TEK unit released Friday. That’s about 160,000 barrels a day more than two years ago before Russia agreed to cut supply with Opec. It’s a post-Soviet record, and not far off its highest-ever output.”
And global oil production is at an all time high:
“In August, for the first time in history, the world pumped more than 100 million barrels a day, according to a new report from the International Energy Agency (IEA).”
Maybe it’s not that China’s appetite for oil isn’t high enough to buoy prices, but that it’s not high enough to buoy prices at a time when there’s more crude oil on the market than there has ever been in the history of the planet. That is something like a more complete picture of what’s going on. And meanwhile the oil industry is watching the price of alternative renewable energy sources like solar dropping dramatically, and will continue to sell oil at a bargain from now until the technological singularity to make its money off these mineral reserves while the party’s still on.
Last modified: March 4, 2021 2:30 PM