Tanking Oil Prices, Oversupply, and Japanese Economy to Blame
The global oil price forecast was supposed to be miserable this week, as the terrorist attacks in Paris and Lebanon raised the stakes for much wider geopolitical conflict in Syria and elsewhere.
There was certainly no shortage of market analysts and media pundits predicting oil prices would crash on Monday, as Western powers vowed heightened military strikes against ISIS as retribution for the attacks in France. (Source: “Global markets brace for short-term hit after Paris attacks,” The Globe & Mail, November 15, 2015.)
Although West Texas Intermediate (WTI), the North American benchmark for crude oil, briefly flirted with the $40.00-per-barrel level during late Monday morning trading, the apocalyptic oil price crash has not materialized.
Paris Attacks: No Real Effect on Oil Prices
It’s at this point that a simple, yet important fact has to be reiterated: geopolitical tremors cannot trump basic economic facts.
While global conflicts, particularly in the oil-producing Middle East, are prone to causing volatile shifts in the oil price by upping the risk to producers and exporters, this time, markets barely registered that fact.
With the danger of a wider conflict now more acute than it has been in years, why didn’t oil prices collapse as a result? After all, if you think back to 2011, with the Arab Spring gaining traction across the Middle East and Libya descending into a violent civil war, crude oil prices absolutely shot through the roof.
The answer is simple and it has next to nothing to do with radical Islam and the blowback from Western countries’ entanglement in the Middle East. While crude oil prices fell in Monday trading, it was the result of two factors unrelated to the Paris attacks. The first is a profound imbalance in the supply-and-demand dynamics of oil, and the second is the worsening economic context in East Asia.
But let’s talk about the former first.
Far more pressing for the oil price forecast than the Paris terrorist attacks is the continued global oversupply of crude oil. If you thought the worst of the oil price crash was over, then think again. The oil price drop could only now be hitting high gear. With U.S. crude oil stockpiles rising for over a month and global storage inching towards capacity, markets are facing a very serious reality check. (Source: Energy Information Administration web site, last accessed November 16, 2015.)
There is too much oil out there and simply not enough demand for it.
Consider that U.S. crude oil storage levels are now at an 80-year high and that the International Energy Agency (IEA) is estimating record-breaking stockpiles all across the world. (Source: “Oil Storage Levels Point To Longer Downturn,” OilPrice, November 13, 2015.) Perhaps more chilling than those raw numbers is the worsening tanker traffic situation in the Gulf of Mexico and around Shanghai, where oil tankers are piling up. (Source: “2-Mile Long Stretch Of Iraqi Oil Tankers Bound For U.S. Shores,” OilPrice, November 11, 2015.)
Forget the Paris attacks; running out of places to store oil is the bigger problem here. But that’s only half the story, because there’s a serious economic crisis brewing in East Asia and I’m not just talking about China.
Japanese Recession Could Crush Oil Prices
Japan announced that its economy slipped into a recession in the third quarter of 2015, adding to the continued pessimism of a wider global economic slowdown. The Japanese economy contracted by 0.8% in the third quarter. (Source: “Japan’s economy falls back into recession again,” BBC, November 16, 2015.) When you consider that this is the third-largest economy in the world we’re talking about and that Japan is one of the top global crude oil importers, we have a problem on our hands.
This bearish piece of news could not have come at a worse time for the oil price forecast, as the global economy tries to shrug off broader market volatility and a Chinese stock market crisis this summer. With China’s economy showing some very real signs of cooling down, producers cannot expect crude oil demand growth from that market.
The Bottom Line on the Crude Oil Price Forecast
While Middle East violence has been known to cause oil prices to spike in the past, there’s really no geopolitical reason behind the latest drop in WTI and Brent. What we are seeing here is a combination of global oversupply and soft economic news from Asia coming together to push down on oil prices.
Forget all the talk about how the Paris attacks will roil global markets. Unless we see a bigger terrorist in an oil-producing state or along a vital energy transportation route, I would not bet on geopolitical conflicts or terrorist attacks contributing to the oil price crash.