Oil will reach $50 a barrel due to economic weakness induced by global reserve bank tightening and high winter heating bills. But it won’t be there long.
With crude oil currently trading between $75 and $80 a barrel, many analysts believe $100 oil is just around the horizon.
However, history does not support such a viewpoint. Following huge oil price shocks, such as Russia’s invasion of Ukraine in the first half of this year, oil prices tend to fall significantly over the next one to two years.
Oil price spikes that are rapid and unexpected tend to disrupt the economy by draining money from businesses and consumers.
Energy is a necessity, and greater spending on non-discretionary commodities like energy tends to lower demand for later purchases that are more discretionary.
High prices also tend to drive greater production, and higher supply paired with decreased demand results in lower prices more frequently than not.
This is the core cause of most commodity cycles: high prices drive down discretionary demand while boosting supply.
In addition to the natural commodities cycle issue, there is currently a significant global monetary policy change from loose money to tight money, which is a near-certain formula for an economic recession.
In a free market economy, where prices spontaneously correct supply/demand imbalances over time, intentionally matching oil supply with demand is extremely difficult. Nonetheless, the non-free market segments of the oil industry are doing their part.
President Biden released oil from the Strategic Petroleum Reserve to improve supplies and lower prices in the aftermath of the Ukraine invasion.
On the other hand, OPEC cut output in anticipation of a looming economic contraction.
Russia is now threatening to join the cuts in response to sanctions imposed on it for the Ukraine war. Still, whether real or perceived, neither of these two cuts will likely compensate for the demand destruction caused by central banks and high winter heating bills.
As a result, $50 per barrel of oil will almost certainly happen before $100 oil.
However, cycles are named cycles for a reason, and when the price of crude oil falls below $50 or less, demand will increase and prices will rise once more.
Russia will be compelled to reduce its oil production over time as Western sanctions erode the technology and skills required to maintain present production levels.
China will eventually recover from the economic downturn caused by COVID and real estate and who knows, maybe the US will be wise enough to replenish the SPR with cheaper barrels than it sold.
All of this will work together to maintain the natural high and low-price cycles that have historically existed in oil and most other commodity markets.
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