Oil Prices Will Fall: A Lesson In Gravity
The oil price collapse is not over yet. It is more likely that the Brent price could fall back into the mid-$50 range than that it will continue to rise toward $70 per barrel.
That is because oil prices have risen based on sentiment alone. The fundamentals of supply and demand indicate a dismal reality: oil prices will fall and may fall hard in the near term.
Our present situation is like that of the cartoon character Wile E. Coyote. He routinely ran off of a cliff and as long as he didn’t look down, everything was fine. But as soon as he looked down and saw that there was no ground beneath him, he fell. Hope and momentum cannot overcome gravity.
Figure 1. Wile E. Coyote cartoons. Sources: The Braiser, Dubsisms and Forbes.
Neither can ignoring the data.
When I look down from $60 WTI and almost $68 Brent, I see no support except sentiment. Like Wile E. Coyote, we need a gravity lesson about oil prices. What goes up for no reason, will come down sooner than later and it may fall hard.
Related: Big Oil May Be Caught Off-Guard By Wave Of Retirement
Let’s examine the facts.
The principal reason for the oil-price collapse is a production surplus–more supply than demand for oil. The latest data from EIA (Figure 2) indicates that the surplus is the greatest since the current oil-price collapse began. In other words, the cause of the price collapse is getting worse, not better!
Figure 2. World liquids production surplus or deficit (production minus consumption), January 2011-April 2015. Source: EIA and Labyrinth Consulting Services, Inc.
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