January crude oil prices fell $3.12 yesterday closing at $43.67, which marks an astounding 71% drop from the June high of $150 (welcome back supply and demand fundamentals).
While commodities as a whole have experienced significant downward pressure, particularly in H208, (reference the CRB Commodity Index), few have seen the type of pressure experienced in the oil market. Is it possible that oil prices can continue to fall as we look to 2009?
The answer is YES. In the short term it seems likely that oil will continue to experience downward pressure as a continued and significant decline in demand will outpace relatively inelastic supply movements. Gulf Oil CEO Joe Petrowski even said yesterday that the price of oil could sink to $20 per barrel, and there is a chance gasoline prices could drop as low as $1 per gallon early next year. $20 oil seems a little extreme, but further downward price momentum is certainly possible.
It seems apparent that suppliers of oil, particularly the OPEC nations, are reluctant and slow to adjust output to efficiently align supply with worldwide demand (despite their rhetoric), and who can blame them. They have become comfortable and accustom to receiving huge revenues from oil exportation. These huge revenues have fueled extravagant domestic projects that now rely on these revenues (look at Dubai). As oil exporting nations face a decline in oil prices coupled with their own domestic economic slowdowns in connection with the worldwide crisis they will continue to look to their safety blanket (oil exports) to generate revenue and sustain economic activity. To reiterate, the result is inelasticity of supply in the oil market and in turn downward pressure on oil prices.
The answer is YES. In the short term it seems likely that oil will continue to experience downward pressure as a continued and significant decline in demand will outpace relatively inelastic supply movements. Gulf Oil CEO Joe Petrowski even said yesterday that the price of oil could sink to $20 per barrel, and there is a chance gasoline prices could drop as low as $1 per gallon early next year. $20 oil seems a little extreme, but further downward price momentum is certainly possible.
It seems apparent that suppliers of oil, particularly the OPEC nations, are reluctant and slow to adjust output to efficiently align supply with worldwide demand (despite their rhetoric), and who can blame them. They have become comfortable and accustom to receiving huge revenues from oil exportation. These huge revenues have fueled extravagant domestic projects that now rely on these revenues (look at Dubai). As oil exporting nations face a decline in oil prices coupled with their own domestic economic slowdowns in connection with the worldwide crisis they will continue to look to their safety blanket (oil exports) to generate revenue and sustain economic activity. To reiterate, the result is inelasticity of supply in the oil market and in turn downward pressure on oil prices.
No comments:
Post a Comment