What Now Oil?

In March of 2008, Goldman Sacks called for $200 Oil prices.

A week and a half ago, they called for $20 Oil prices.

In 2008 it was all about demand. In 2015 it is all about supply.

That is economics at its finest: supply and demand will determine price.

As it is in any cycle, eventually supply and demand will find equilibrium and settle in a narrower price range. Until that time "price discovery" and the various participants involved in the process (analysts, economists, traders, speculators, end-buyers, end-sellers, etc.) will "place their bets" as to what the next move might be.

As prices have fallen, higher cost producers have reduced production, but the impact takes time to develop.

The International Energy Agency (IEA) predicts that US production will significantly decrease in 2016.

Falling Supply:

But, of course this all takes time to filter through the global economy and in the interim, there will be lots of "noise" about all the different inputs into the equation.

And of course, there is the "politics" of oil.

For those "developing" economies (and other producing nations) that are dependant on oil, there is plenty to worry about, especially the debt burden that is tied to growing their economic development.

Economic uncertainty can and may create political instability.

So the caution being exhibited by the US Federal Open Market Committee in their latest analysis of the global economic environment is warranted. As will always be the case there are opinions on whether they should have started the interest rate "normalization" process sooner, rather than later, however (as this blog has been suggesting since the beginning of the year):

Central banks do not like volatility, because it creates uncertainty and undermines economic confidence. Without confidence, consumers will not consume and businesses will not invest in increased production.

An overly optimistic central bank risks credibility. So it might be a good thing that the FOMC proceeded with caution.

Oil supply and demand will give us a good reading on the state of the global economy and its current status is indeed a cause for concern. The cycle will unfold as it always does, but the timing of the adjustments will be what we need to prepare ourselves for.