Tuesday, December 16, 2014

How far will crude oil fall?



Previously, I used EIA and St. Louis Fed data to analyze oil price fluctuations since 1986.    This data did not allow me to compare the slide in oil during the 1980s to the slide today.    I emailed the St. Louis Fed asking for older oil price data.   They sent me a link to a discontinued West Texas Intermediate Crude data for 1946 to July 2013.  



With a slight adjustment this data can be combined with recent data.   I used the current WTI price of 56 to proxy for December.   (The month is not over and oil is in free fall so this analysis may understate the current crisis by a bit.)


A quick snapshot on the magnitude of the current decline of oil:


12-Month Decline History:

The current 12-month decline is around 43 percent.

The largest previous 12-month decline in the price of oil was around 58.9.   It was recorded in February 2009.

In 1986 there were four months where the 12-month decline in the oil price was over 50%.


24-month Decline History:

the current 24-month decline is around 37%

the largest previous 24-month decline was in July of 1986, which is when oil reached its trough of $11.58 per barrel.  (Of course this is 1986 dollars not 2014 dollars.)


Is current situation analogous to 1986?

I don’t know.   But if the price of oil reaches its inflation-adjusted trough we are talking about $26 oil sometime late spring or early summer.  


How long did oil stay down:

In 1985 Oil averaged $27 per barrel.  It did not return to that level until year 2000.

See below.



Date
WTI Oil Price
1946-01-01
1.358
1947-01-01
1.841
1948-01-01
2.570
1949-01-01
2.570
1950-01-01
2.570
1951-01-01
2.570
1952-01-01
2.570
1953-01-01
2.716
1954-01-01
2.820
1955-01-01
2.820
1956-01-01
2.820
1957-01-01
3.043
1958-01-01
3.058
1959-01-01
2.975
1960-01-01
2.970
1961-01-01
2.970
1962-01-01
2.970
1963-01-01
2.970
1964-01-01
2.945
1965-01-01
2.920
1966-01-01
2.937
1967-01-01
3.027
1968-01-01
3.070
1969-01-01
3.295
1970-01-01
3.351
1971-01-01
3.560
1972-01-01
3.560
1973-01-01
3.873
1974-01-01
10.373
1975-01-01
11.160
1976-01-01
12.645
1977-01-01
14.296
1978-01-01
14.850
1979-01-01
22.404
1980-01-01
37.375
1981-01-01
36.667
1982-01-01
33.636
1983-01-01
30.395
1984-01-01
29.276
1985-01-01
27.973
1986-01-01
15.05
1987-01-01
19.20
1988-01-01
15.97
1989-01-01
19.64
1990-01-01
24.53
1991-01-01
21.54
1992-01-01
20.58
1993-01-01
18.43
1994-01-01
17.20
1995-01-01
18.43
1996-01-01
22.12
1997-01-01
20.61
1998-01-01
14.42
1999-01-01
19.34
2000-01-01
30.38
2001-01-01
25.98
2002-01-01
26.18
2003-01-01
31.08
2004-01-01
41.51
2005-01-01
56.64
2006-01-01
66.05
2007-01-01
72.34
2008-01-01
99.67
2009-01-01
61.95
2010-01-01
79.48
2011-01-01
94.88
2012-01-01
94.05
2013-01-01
97.98


Of course, in 2009 oil rebounded pretty quickly.   The 1986 event seems a bit more applicable because 1986 and now involves oversupply while 2009 involved a demand shock that started in the housing sector.

Concluding thoughts:  It is undoubtedly true that the lower oil price leads to some buying opportunities   But where and how much and when are all complex issues.  

A general energy price decline might lead to a better opportunity in natural gas than oil.  

If history is a guide, we should not count on a quick rebound.  


Maintain a balanced portfolio.

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