Oil Prices Jumping Today
Crude oil prices exploded today, jumping 8-9 percent in a single day on good news. (The American WTI to 40.6, the European Brent to 42.8.) “Pfizer’s Covid Vaccine Prevents 90% of Infections in Study”–this was the breaking news. If so, and the vaccine will be distributed fast next year, the economy may recover in a couple of months. So may crude oil prices. But what is the long-term picture?
In 1990, the crude oil price of the European Brent type fell to a bottom of 16 USD. In April 2020, the price of the same also tanked at $16. What is different now? Nothing has changed in 30 years? Yes, of course. For example, don’t forget inflation.
Crude Oil in the Rift
The US consumer price index surged to 260.3 from 132.7. That means prices almost doubled in three decades. The $16 Brent crude oil price from April 1990 is $32.2 worth at the actual price level.
But the real crude oil price lows, at least in the mentioned decades, came later, in December 1998. Brent price fell to $9.55, which means $15.2 in today’s dollars terms. Some lower than April 2020, by $16.2 (inflation-adjusted). But not so much lower. This year’s bottom was near the 30Y bottom, also the inflation-adjusted price.
But why is all this ancient data important? It can help to find the really low levels of crude prices. Is crude indeed cheap historically, in the long term? Is it a buy? Is this crisis a huge buying opportunity?
Low Crude Prices Are Normal
On the above chart, we see the inflation-adjusted price (red line) almost always over the actual price of $42.8. (Marked with the green line.) But only half of the time, from the year 2004. Before that, the adjusted Brent crude price was mostly lower than the actual level. The mean of the prices before 2004 is $37 in case of the maximum prices. And $32 by the minimum prices. (In nominal terms, not-adjusted, $22 and $19, respectively.)
That means the low prices of this year aren’t so extraordinary as they may appear. A couple of years with Brent (or WTI) prices below 40 USD would be no surprise. Especially when the crisis lasts longer than many people expect. For example, if the vaccine will be late or will have less effect than expected. And many people don’t even want to vaccinate themselves. (Read about my worst-case predictions here.) Also, the long-term oil price trend keeps showing a downward movement. (See the second chart.)
Neither Expensive Nor Cheap
But, if the vaccine arrives fast, proves to be very effective, and most people let vaccinate themselves, oil demand may increase, and prices may surge. Far higher prices than today are also possible and conceivable. The actual price is somewhere in the middle of the long-term highs and lows.
So crude oil seems neither too expensive nor too cheap historically. But the $16 price in the spring was remarkably low, also over the three-decade horizon. (Of course, also the famous negative WTI Crude price anomaly. Or, the WTI prices around $10 in the following days.)
My inflation-adjusted commodity price series:
More Pain in the Crude Oil Price?
OK, higher crude oil price levels are also possible. Although, not sure how long a Crude bull trend would last. The pain may not be over in the market yet. Not even regardless of the virus crisis. Not only the carbon-emission reduction efforts or the imminent electric vehicle revolution are hitting hard the crude oil industry. The sector, like all other commodity sectors, is cyclical. Look at the images of Visual Capitalist, the price indices of major commodity groups. Oil price moves in a historical downtrend, and the bottom seems to be years away. (Volatile Commodity Returns, Commodity Super Cycle.)
Unlike stocks, which tend to move higher over time, commodity prices cycle through powerful multiyear booms, followed by spectacular multiyear busts. These are called “supercycles.” Obviously, no one can be certain that this year’s commodity rally is the birth of a new supercycle. But the devastating commodity bear market of the last decade was exactly the sort of event that creates conditions for a new bull market – wrote Investorplace.
Every Cycle is Different
Investorplace seems to be optimistic, announcing the beginning of a new cycle. But every cycle is different, and in general, very long. Some commodities, like metals, seem to have had their inflection point this year. But crude oil has not.
No two supercycles are the same, and the length of the upswing and the downswing phases can vary considerably from cycle to cycle. It can take anywhere from 5 to 17 years, for example, for the cycle to reach its peak and another 14 to 28 years to reach its trough. (Bank of Canada)