by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Like lower gas prices? Gene Epstein examines in a Barron’s cover story the prospects for future price drops at the pump.
Oil bulls, take heart. The last leg of the bear market that began in mid-2014 is probably in sight, as marginal producers fall by the wayside. Supply cutbacks should bring a rebound in the price of crude by the second half of 2016.
But before a rebound, West Texas Intermediate crude will probably continue to fall, perhaps as low as $20 a barrel, before vaulting to the mid-$50s by year end.
Stock market investors can also take heart. The stock indexes have been closely correlated with oil of late, moving up or (mostly) down, as the price of crude has gyrated. This perverse pattern has persisted even though the overwhelming majority of global companies benefit from cheaper crude, since they buy the refined products to help run their operations.
It’s true that many oil exporters are in emerging market economies, and low oil prices have slowed their economic growth and put a dent in their sovereign wealth funds. Beyond this, stock traders may be subscribing to the misguided belief that low oil prices are signaling imminent global recession.
Our expected recovery in crude by the second half of this year will, therefore, probably bring a recovery in equities. And perhaps even before then, stock traders might wake up to the fact that the bear market in oil has mainly been reflecting a world awash in black gold.
While global weakness on the demand side has played a part in the buildup of excess supply, it has been weakness in the rate of growth, not an outright economic contraction. A further slowdown in global growth, especially from China, will also play a role, but here again, the supply side will dominate, as cutbacks in production bring a rebound in prices.