What changed the oil market?
Until a few weeks ago a target price of $100 for crude would have been laughable. The market seemed sure prices would steadily climb towards $200.
So what has happened since then, other than the 25% fall in price?
For a start, many people now predict a fall in global demand, as economies adjust consumption in light of growth forecasts and the high price. This reduction in planned consumption has released the pressure which kept oil at $140 per barrel.
However, it was well known several months ago that further rises in the price of oil would damage the economy; in other words that $200 was not sustainable.
Why then were we so happy to believe prices would continue to rise, and why are we not now revising growth forecasts back up, in light of the recent fall in oil price?
That growth forecasts are not being seriously revised is due to tight global credit markets and perceived instability in the financial system restricting investment, while commodity price inflation is still hurting consumers’ real spending power.
The question of why we were willing to believe oil would continue to rise is more challenging: I believe the markets underestimated the speed with which the US credit problems would spread to the real economy outside the US. This led to an early reduction in oil consumption expectations and a relative strengthening of the USD. Both of which have caused the oil market to correct itself quicker than anticipated.
Tags: Business News, Commodities, Credit Crisis, Crude, Forecast, Global Economy, International, Oil Commodities
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