Why the price of oil is headed much lower in 2015
- Published on Wednesday, 18 February 2015 07:56
Hope has returned to the oil market after the price jumped over 20% in the past couple of weeks from multi-year lows. The price of oil, however, has been falling since June 2014. The price of Brent Crude, the European benchmark, for example, has fallen from a high of $114 in June to a low of $45 in January. The recent rise to the $60 range has caused many analysts and commentators to celebrate the end of the collapse of oil prices. I, however, believe that the recent bounce is no more than a ‘dead cat bounce’ on the way down to much lower prices in the near future… and here’s why…
The truth is commodity prices have all been fallen and not just oil as you can see from the chart below. The reason for the fall is due to falling demand. Popular media would have us believe that we are in a recovery and that the global economy is improving, when in fact, markets (except for a few stock markets) tell us otherwise.
As a result of falling demand and a global slowdown, we are now seeing a powerful and unstopable trend towards global deflation. Here are some recent headlines that speak to where we are headed:
If we are to expect central banks to come to the rescue, let’s not forget that they still haven’t been able to do what they promised they would do in the first place. Remember the 2% inflation target the Fed set? Here’s what the Wall Street Journal had to say about this recently:
So if the Fed hasn’t been able to achieve it’s inflation target despite all the QEs, why should we expect them to save us from deflation?
We are headed for a deflationary spiral that has laready began with the fall in commodity prices. It will not take long for other markets to follow this trend, which spells trouble for debt and derivatives markets. In the meantime, the least we can expect from oil is for it to soon resume its fall, eventually falling below its lows in the $30s set back in late 2008.
Source: The Financial Express (click on image for larger size)