In fact, the WTI price curve is now developing a downward trend. Price has been going down steadily since October 21st, despite turmoil in Venezuela – and rumors of PDVSA’s default – and more recently an attack on a pipeline in Nigeria. Event like these would have probably sent WTI prices up just a few years ago, but the lack of enthusiasm about oil prices seems to stem from longer term concerns about demand, and to a lesser extent from OPEC’s historic inability to commit to production cuts.
On the demand side, less international commerce, China’s slowdown, technological and regulatory change, are dampening chances for higher prices in the future. There is no doubt that a wave of anti-globalization will take a bite out of raw material prices, as a reversal on trade barrier elimination policy will inevitably result in higher prices for foreign products and subsequently lower global demand.
China might be suffering from the effects of this tide already. Its export-centered economy has been slowing down, with lower manufacturing output – which is also due to other factors. China now has a surplus of oil products that it is trying to sell abroad. All the forces in the second largest economy on earth, augur lower oil prices.
On the other side, the rise of the electric car could substantially disrupt oil markets. While the electric car is not a market force yet, if companies like Tesla and GM can overcome battery issues – including sources for Lithium, range and charging concerns – oil will certainly suffer. In the meantime governments are stepping up legislative and regulatory efforts that will boost the adoption of electric engines. Germany for example, declared it will get rid of internal combustion engines by the year 2030.
With those changes rapidly approaching in the horizon, OPEC has tried to bolster prices through production cuts. The problem is OPEC members rarely ever stick to the agreements. In fact, small supply side shocks during the past week, have not had a significant effect on oil prices, which are still falling. More fundamental supply side shocks, like perhaps a PDVSA default or the materialization of an imminent collapse in Venezuela, may serve to send prices higher.
Nevertheless increased production from other players – including shale oil companies – would immediately come into the picture, putting a downward pressure on prices again. Only the current lack of investment in exploration and development of oil fields could eventually give a longer term boost to WTI prices. In the meantime, it seems like an oil bull stampede is not a likely scenario.
