In 2012 a report produced by the UK Ministry of Defence predicted that oil prices would rise significantly out to 2040, and by “significantly,” they meant to $500 per barrel. Today, after nearly two years of low oil prices and much talk about an oil glut this may seem farfetched. But we shouldn’t dismiss UKMOD’s warning. This could turn out to be the most important development facing humanity for decades to come.
In the second half of 2014 we experienced a dramatic collapse in oil prices which rippled through to 2016. The narrative accompanying this collapse involved much hype about the US fracking boom and slowing global demand due to recession. On top of this, it was understood that Saudi Arabia delivered the coup de grace to the oil price by flooding the market with excess oil or refusing to curb output amid an existing supply glut. As the bearish narrative became entrenched, many analysts thought that oil prices would drop to the $20/bbl range (as they briefly did this January) or even lower and stay low for many years. However, the prevalence of a bearish narrative does not mean that prices will remain low for long.
It is important to note that major price dislocations tend to generate their own narratives as information consistent with the price move gains prominence while opposing views get sidelined as unrealistic and wrong. For example, in 1997 hardly anybody expected the oil price to halve over the following two years, but it did, and by 1999 the bearish sentiment was almost universal, just before oil prices rallied again by 250% over the next 20 months from $10/bbl to $35/bbl and pushed on to above $140 by 2008. Therefore we must consider that today, in spite of the (recent) bearish consensus, another unexpected price dislocation may be brewing. We need to consider the elements that could shape up a new bullish narrative if prices start heading upward. I will present this report in five parts, published over the following days:
- Making sense of Saudi Arabia’s oil reserves and production capacity
- Oil production and the evolution of drilling technologies
- Revisiting the peak oil hypothesis
- Sources and quality of oil market information
- How should industry players cope with risk and uncertainty of the looming crisis
I will publish the first of the five parts tomorrow so please stay tuned.
Alex Krainer is an author and hedge fund manager based in Monaco. Recently he has published the book “Mastering Uncertainty in Commodities Trading“.