The price of oil has dropped almost 20% in the three-week period since the middle of June. Even with this recent drop, the price is still trending high. The last time oil was trading consistently above $75 per barrel was in 2014 and the years preceding it. In addition, the current $100 Brent crude oil price level has only been seen twice before in history. Furthermore, oil supply is still tight which reflects in the revenue that oil companies are taking in.
However, investors can learn an important lesson from the recent plunge in oil prices.
Only a week prior to the plunge, Foreign Policy published an article titled: “Get Ready for $150 a Barrel Oil Soon.” The author, considered an expert, predicts that oil will reach $150 before September. He says: “Short of imposing an economic recession or mandating major cuts to consumption through a pandemic-style lockdown, there is little the Biden administration can do to avoid the coming price shock.”
Nonetheless, it is precisely that scenario of a recession that is driving oil prices down. With the Fed raising interest rates, and inflation continuing at record highs, fears of a global slowdown may stunt oil demand.
Are experts wrong?
This is not the first time experts have predicted oil prices would go through the roof.
At a conference in March, Occidental CEO Vicki Hollub said that oil prices could reach $150 as a result of the Russia-Ukraine crisis. At the time, oil was trading above $120. Only a week later, oil tumbled below $94 as a result of Russian-Ukrainian negotiations to potentially reach a settlement as well as new Covid lockdowns in China, which would increase oil supply and lower demand.
Despite shedding more than $25 per barrel in a week, oil prices would rise again to around $115 a week later. This time, it was a disruption to the Caspian Pipeline Consortium which threatened to reduce more than one million bpd of global oil supply, and the EU considering a ban on Russian oil imports.
Nonetheless, in early April, President Biden would release petroleum reserves into the market, driving prices down due to increased supply. Prices would continue to drop to around $94 on April 11 with fears of new lockdowns in China and IAEA companies planning to flood the market with oil.
Nothing can stop it?
On February 16, 2022, CNBC correspondent Natasha Turak quoted a veteran analyst saying that oil would hit $150 bpd. She opened the article with the sentence: “Oil prices are soaring and nothing appears to be stopping their ascent.”
But it’s on this point that investors should be cautious. Nothing seemed to be in the pathway of the Titanic until an iceberg appeared right in front of it. Over the past year, analysts have been predicting that oil would trade at more than $120 and more than $150. The economy reopening after Covid would release pent-up demand and send oil prices soaring. There is logic to this, however, investors should keep two points in mind.
The first point is that there are so many unknown factors for analysts. Forecasts should, therefore, be understood as predicting a situation that could come about if all conditions remain the same. Could that happen? Yes. But as we have seen, oil is fluctuating due to many unforeseen events. For example, just as economies seemed to be over the hump of Covid, the Omicron wave struck and oil shed 25% within a short period of time.
The second point is that even though oil has reached more than $120 bpd, it has remained at that price for very short periods of time because new factors are entering the equation which are pushing prices down.
For investors hoping to ride the oil waves, bear in mind that a wave crashes and stays at its peak for a short period of time.
On TBanque, investors can gain exposure to the value chain surrounding oil through the OilWorldWide Smart Portfolio.
