Quarterly Energy Comment (December 17, 2019)
by Bill O’Grady
The Oil Market
Since June, oil prices have held mostly within a range of $50 to $60 per barrel.
After a sharp decline in prices from late May into early June, due in part to a contra-seasonal build in inventories, inventories fell and oil prices rebounded. Rising tensions with Iran added to the lift in prices in September. Since then, we have seen a retest of the lower end of the range and a steady recovery. Soon after year-end, we usually see a seasonal rise in inventories, which tends to weigh on prices. However, with the advent of exports, that seasonal pattern has become suspect. For example, last year we didn’t see the usual increase in stockpiles.
Thoughts on Oil Demand
In general, forecasting demand is not usually a priority in commodity analysis. The shape of most short-run commodity demand curves is inelastic, which means that quantity isn’t very sensitive to price. Demand inelasticity means that a small change in supply can have outsized effects on price. It is because of that structure that commodity analysts tend to focus on supply. That being said, demand is important over the long term. For example, the effect of environmental regulations and consumer sentiment has adversely affected coal demand and severely depressed prices. The price of coal didn’t fall because supply expanded; it fell because demand declined.