Investment Markets » Natural Resources
Will Oil Prices Continue To Fall?
Many pundits predicted the oil price would soar to record levels, but in fact it has fallen sharply. Where will it go next?
The unpredictable market in black gold is not for the faint of heart. Not long ago, oil bulls were predicting the price would hit $100 a barrel - but it has gone the opposite way, plunging 23% in the past six weeks to below $60. Even by oil's versatile standards, this is a significant correction, which has caught many on the hop.
Amaranth, a US-based hedge fund, lost an eye-watering $6bn betting on natural gas prices, which have been dragged lower on oil's coat tails. Closer to home, Ryanair took a $10m hit having hedged its aviation fuel costs at the equivalent of $73 a barrel.
The rapid fall reflects the end to the conflict in Lebanon, less bellicose noises over Iran's nuclear programme and BP's return to production in Alaska. Higher inventories have also countered fears that oil could run short this winter.
Whatever the reasons, cheaper oil has arrived in the nick on time. Falling prices will soften the effect of the weakening housing market on the US economy. One estimate says the sudden change of price direction has reduced the total cost of oil to the US by $40bn a year.
But don't assume that cheaper oil is an automatic panacea for inflation worries. The correction might be presented as a point for the doves, but it is more a point for the hawks. Cheaper petrol will free consumers to spend more and push up core inflation. And it may not be good for equities, because the FTSE 100 is heavily weighted towards oil and commodity stocks.
Will prices continue to fall? That's the new consensus. Speculative money is running away from oil - even a major supply threat such as the Russian attempt to muscle in on Shell's Sakhalin-2 venture has barely caused a ripple.
The talk now is of $50, or even $40 prices next year, but for that to happen, two things are needed: relative international calm and a further cooling of the US economy. The latter may be likely, but political calm is a much less safe assumption.
Iran, Venezuela and other oil exporters have grown fond of sky-high prices and are not going to give them up easily. The soundest reason to think the journey from $80 to $40 won't be so quick is this: when everybody in the market agrees there's only one-way to go, a nasty reversal usually follows.
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