Oil and other commodity

Dynamics of oil prices

Oil prices, once started to slump, that process will take about seven months to complete. I found a note written in Jan 2016 (see photo #2). The seven months time has been proved in the oil price slump in 2008, 2014, 2015 and some other cases. The reason for that duration is related to the time that is needed to rebalance the supply demand relationships. When oil is in surplus, it takes time for oil companies to plan and adjust production, and it takes time to ship oil from crude field to consumers, and it takes time for consumers to change their consuming behaviour. In aggregate that total time is about seven months based on experiences in the past.

This time the oil prices came down since the beginning of the year, and were accelerated by the economic slowdown due to COVID-19 and the price war between Saudi Arabia and Russia. Before these two events, market was expecting a mild economic slowdown in Q1 this year and oil price trend was responding to that until these two events made the prices much low.

I do not think the oil prices will go much low to complete seven months this time as the $20 per barrel is a kind of low bound saturation. If the COVID-19 situation stays for long and the price war keeps on, then the oil prices will remain at 20s until middle of this year. If any of the two events subside, then the prices will go up.

But long term oil price is hard to go above $50 a barrel. The very large US debt requires low inflation or low yield of treasury bonds in order to maintain its debt sustainability and debt obligation. In a very long period, in our life as well as in our children’s life, the increase of oil prices will be limited by any inflation concern. Thank god the US has enough oil reserve to leverage the price limit.