“Over the past three years, the price of oil has tripled, peaking at $78 in mid-July,” says Liam Halligan in The Sunday Telegraph. But in recent days, crude has dropped into the low $60s, shedding all its gains for the year. “No wonder there is talk that the oil price cycle has turned and that we’re heading back to $25 a barrel, the average during most of the 1990s.”
Oil fell “partly because of the hubbub over the recent discovery of massive oil reserves in the Gulf of Mexico, partly because… hurricanes haven’t disrupted Gulf oil drilling this year, and partly because geopolitical problems haven’t significantly disrupted oil supplies”, says Harry Domash on MSNMoney.com. But the response to all these issues looks overdone and the dip “probably indicates a buying opportunity, not the start of a long-term trend”.
For starters, the deep-water Gulf of Mexico prospects are not hugely significant. At most, total reserves are not much more than two years worth of US consumption and it will be several years before the find begins producing in significant quantities, says Domash. And geopolitical problems haven’t gone away, says Irwin Stelzer in The Sunday Times; there are serious issues in Venezuela, Mexico, Iraq, Iran and the rest of the Middle East that limit hopes of reliable new production from these countries. “Only Canada holds the promise of significant, trouble-free supplies.” The demand situation is no less tight either, says Halligan. “Peer into China’s future and the oil-price outlook gets scary.” China’s oil consumption is likely to overtake the US within the next decade as incomes rise and per-capita energy use increases; the same is also true of other large emerging nations, such as India and Brazil. “Understand that, and you’ll understand why, despite hype about ‘cheap oil around the corner’, futures markets are predicting oil close to $70 until 2011 at least.”
Nevertheless, prices could remain soft for a while if we head into a global slowdown, says John Mauldin on InvestorsInsight.com. They might even drop sharply below $60 a barrel for a short period. “But that would only be a temporary setback. Long term, as world demand for energy of all types will grow, oil prices are going to rise.”