Oil prices have crashed again – but don’t expect it to last

The oil price had been staging a comeback. But now it’s taken another tumble. Matthew Partridge looks at how far it might fall, and how you could profit.


The oil price had been staging a comeback; now it's taken another tumble

Amid the recent frenzy over Greece and China, you could be forgiven for missing the turmoil in another key market the oil market this week.

After collapsing at the end of last year, the price of oil had been recovering. From a low of around $45 a barrel in January, Brent Crude had surged to over $65 an increase of 45%.

Yet in the last few days, prices have been tumbling again, falling as far as $55.

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Will it continue? And how might you profit from it?

The forecast suggests a blizzard of money printing

In part, it's Greece. In a risk-off' environment, oil suffers as traders fear for global growth and favour the US dollar, which tends to hit commodity prices in general.

And of course, concerns over China's growth are also bad news for commodity prices. After all, it was demand from China that drove the decade-long supercycle that started in the early 2000s, as my colleague Dominic Frisby noted earlier this week.

The thing is, without wanting to be too simplistic about it, both of these crises the China crash and the fears over a Greek exit are likely to encourage one specific response from the authorities: more money printing.

China is already intervening heavily in the market. As for Greece, it really does look like, one way or another, the situation will be resolved or at least make some genuine progress by the time this weekend is over.

So chances are that the risk-on' trades including oil will make a comeback, either as a result of improved sentiment or because another blitz of printed money hits the market.

Supply and demand in the oil market

That said, it's easy to overstate the impact of Iran. For a start, talks remain deadlocked. There are still hurdles to overcome, and Iran has reneged on promises to end its nuclear ambitions many times in the past.

Even if a deal is agreed, it will take time for the sanctions to be lifted. In all likelihood, it could be at least a year before large amounts of Iranian oil hit the market. And even if exports return to their pre-sanctions level, it would still only add 1.4 million barrels a day to production, an increase of 1.5%.

Meanwhile, hopes of a continued surge in US oil production look misplaced. True, the number of US rigs in use has risen recently, with a few shale producers thinking about restarting production. But that's following on from a massive collapse the total number of rigs in use is down from a peak of 1,600 to just over 600 now.

And although shale oil has unquestionably transformed the oil market, the main US energy agency (the Energy Information Administration) thinks that production has peaked and will decline throughout this year and the next.

There's also the demand side. The drop in prices has helped to drive up demand for oil. The International Energy Authority has noted that, after a slight fall in recent years, oil consumption is back at record levels.

Part of this is down to the fact that lower prices are making people and companies less focused on the need to conserve fuel. However, it's also down to the fact that the US economy is recovering. Indeed, much of the growth came from American drivers, as well as a surge in Chinese demand for gas-guzzling SUV's.

So while we're unlikely to see $100 a barrel again soon, there are also good reasons to think that the outlook for oil is less gloomy than some expect. How can you profit?

We'd stick with the oil giants who are able to make money, even in current circumstances, while having enough cash to pick up those minnows who have fallen on hard times. I've taken a closer look at one of the most appealing in the latest issue of MoneyWeek magazine. Get your first four issues free here.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri