i dont believe some of those ^ charts, i guess it depends on which crude theyre using to benchmark.
a drop in oil prices is a massive boon to global economies, at least the oil consuming ones, obviously the opposite for the producing ones. the drop had been for two principle reasons and an ancillary third one -
1) long time line projects are all hitting, so there is a flush production: just to clarify this a little, (i) if an isolated offshore deepwater oil discovery is made, obviously depending on size and proximity to other infrastructure, developing a find, producing it and selling it is a project that takes 5 years + and results in a chunk of sudden supply (ii) clearly the shale phenomenon has been vastly successful, this is much more controllable in that it can be turned on and off quite easily, and is relatively expensive to produce (70-80$ return hurdles)
2) an increase in supply described above has coincided with a slowdown in the fastest growing energy consuming global economies, so on the margin, demand is dropping too, at least in terms of growth in demand. combine those two together spells doom for any commodity, and if you add in the impact of s strengthening dollar, since oil is denominated in US dollars, that adds to the expense of oil and so dents demand further.
3) opec has lost share to firstly to russia a few years ago - that was a result of re-completions of old oil wells from the 60s and 70s once the end of cold war allowed western oil service companies to go in and apply modern techniques - again flush but temporary production, and secondly to the usa with its shale success. either opec can take this lying down, cut back their own supply to keep prices where they want them, but lose market share to the countries with increased production, or they can maintain production and volumetric market share and march oil prices down. the main opec producers, saudi and their minions can tolerate lower oil prices far better than their competition because i) they have huge excess cash reserves and ii) they have far lower breakeven costs of production. consequently opec's meeting this thursday/friday is likely to keep oil markets week, although this is largely anticipated already.
in terms of inflation, the main issue driving in inflation was the result of excess debt. most global markets overly endebted, are inflating their way out of the problem - ie, suppose you owe $10bn; if you increase the supply of currency, you decreasethe value of a dollar (supply and demand), the less value that a dollar is worth in real terms (ie in terms of actual things, gold, silver, oil, corn, water etc), the less the value of your debt in real terms. however, a consequence of that is inflation, since people still need oil, gas, water, food, things, which dont change in terms of real value by this process of currency printing. what it means is that if a loaf of bread cost 1$, and you print twice as many dollars as there were before, a loaf of bread is now worth $2.
it helps inflation a lot that energy prices are dipping, but in my opinion this is a temporary supply/demand imbalance. at $75 WTI, we're already seeing cap ex budgets being lowered at oil and gas producer companies, which means less investment in production, and so less production, redressing the supply demand equation. if you add onto that the reality that current production, at any point in time as a stand alone is not stable since any oil well declines with time, its not difficult to see how this perfectly cyclical market self corrects, essentially to a level of low double digit returns on the highest marginal cost of production at the current rate of demand of oil globally.
so in terms of inflation, i expect that a) although it looked like energy was the cause of inflation, thats not entirely true, it was to some extent true, in the sense that energy is naturally cyclical in nature, but the main underlying issue driving inflation is debt, quantitative easing, and currency supply (which is why the ppp/pmln governments are to blame, they will always borrow more and more unless they ramp up tax revenue which they wont do) b) we have had an easing in inflation because of the cyclicality of energy as opposed to the debt issue being completely resolved and so c) the saudi minister is right to some degree, the energy cycle will balance, this might take months or a year or two, given that marginal production costs are in the 70-80 range, its difficult to see how unless there is a massive drop in global oil demand (bear in mind i think that oil demand has not grown year on year for only one year in the past 50 or 100 years or something) that prices will dip sustainably below that level. shale oil might delay this rebound, just as it did with gas markets in the usa when shale gas became the in thing seven or so years ago.
ironically if prices do stay low because of shale oil supply, economic recovery will mean greater oil demand, and so the cycle will start again.
...jks..still not good.
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