With all eyes focused on the Eurozone and its effect on major world currencies, it’s easy to lose sight of what is happening in other sectors of the economy. Oil, however, is always in the forefront of our minds and the question of its future continues to keep investors on edge.
Analysts differ as to where oil prices will end up when the dust settles, with forecasts ranging from as low as $38 to as high as $60, either figure significantly lower than the $100 average it held over the last five years.
Estimates from Bank of America Merrill Lynch put the short-term floor somewhere below $35 a barrel — a decline of nearly 30 percent. Some options traders are placing bets that prices could even sink into the $20s in the months to come.
Many forecasters believe that crude oil’s downward spiral may soon be over but most don’t see it happening before the fourth quarter and where it stops, nobody knows. A supply glut, mostly from the Middle East markets which are oversupplied by about a million barrels of oil per day, is blamed for the bearish oil market. This is intensified by the sluggish demand from major economies such as China, Russia and Brazil.
Prices to Reach Rock Bottom
According to John Normand, head of foreign exchange, commodities and international rates research at J.P. Morgan, “the recent spike in prices and increase in volatility offer further evidence that oil markets are approaching a trough.”
Normand cites the volatility and degree of the price declines since last summer as highly unusual and finds difficulty equating it with past oil crashes as far as benefiting the global economy or affecting any other financial repercussion. The absence of inflation, and in some cases fears about deflation, has encouraged central banks to try a more compliant stance than would have been taken under other circumstances.
Oil producing countries seem to be caught in the middle. They all want higher prices but none are willing to cut back on production which would be called for in order to balance supply with the depressed demand that has resulted from economic weakness across much of Europe and Asia.
In fact, with Europe stuck in a financial bind, Japan dealing with its recent sales tax hike and China still trying to control its runaway housing debt, the demand for oil is unlikely to increase anytime soon.
Normand doesn’t see much stability in the months ahead and advises investors to move away from the euro and emerging market debt and focus instead on yields such as U.S. Treasury’s and U.K. bonds. Energy equities can also prove profitable.