Are Oil Prices Finally Coming Down?

Oil prices are made up of components, supply and demand.

The market tends to forecast near term supply for oil reasonably well. There is a lot of data out there, and a lot of smart people crunching it.

The big bugaboo in predicting oil prices, however, is forecasting short term demand. The main variables in demand tend to be economic growth rates in the US, Europe, China, and SE Asia. If those economic growth rates exceed what oil analysts expect, oil prices tend to rise. If they don’t, oil prices suffer.

As you can see in the recent press, oil price recently fell about 10% on overinflated demand predictions.

Falling Oil Price News Article

The last time oil hit a low of $11/barrel was only 7 years ago in 1998/1999. It was right after oil had risen to a recent high of $35/barrel in the mid 1990s caused mainly by heavy demand growth from rapidly growing SE Asian economies, and the solid US economic growth during the Clinton Administration, at a time of tight supply. During this time many OPEC countries were producing above their quotas, and when the “Asian flu” hit and took a bite out of demand, oil prices cratered. On the supply side, several years of relatively high stable prices had seen increasing investment in new oil production, just like today. And those new supplies kicked in just as demand dropped. OPEC, which usually balances supply, did not act quickly due to internal fighting, and we saw oil prices drop by 2/3rds in a very short period.

Similar situation today. No one knows when demand will falter, but when it does, watch out.

This is a cyclical industry. Let none of us forget it.

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