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Thursday 26th July 2018
Hi Friend,
Where next for oil prices ... ?
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| Oil prices Brent Crude are easing in July from the average $74.4 dollars in June. The Summer heat wave is soft for energy prices. Markets appear largely unaffected by the increase in tensions between the US and Iran over the past few days.
$150 - $200 dollar prices could be the impact of serious conflict with Iran, warn some analysts. Iran is threatening a squeeze on supply via the Straits of Hormuz as a disruptive option.
Disruption would have a serious impact on and prices in the short term. A bounce above $100 dollars would appear to be an inevitable consequence of any oil blockade.
President Trump has threatened President Hassan Rouhani, with an "ALL CAPS" Tweet! That's as serious as it can get in White House diplomacy. He has also urged the House of Saud to boost production to ease prices lower.
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| The Answer lies closer to home ...
The solution to rising oil prices may lie much closer to home for the U.S. President. Our research compares Oil prices Brent Crude basis to the Baker Hughes oil price rig count in North America.
When oil prices averaged $100 dollars, the US oil rig count averaged over 2,000 rigs. US supply was rising to ease the oil price pressure.
As oil prices fell towards $40 dollars in 2016, the oil rig count fell to 500 rigs. US shale extraction became largely uneconomic at this point and domestic output contracted.
Later as oil prices rallied through $60, then $70 then $80 dollars, US production expanded. The rig count doubled to 1,000 rigs. US supply is becoming a better arbiter of prices than the OPEC cartel. The correlation between oil prices and the rig count is very high. In fact is is 0.9162.
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| Evidence of Lag ...
There is evidence of lag in the data. It takes time for supply to be extended or contracted in terms of oil rig commissioning and decommissioning.
We can identify a time lag of sixteen weeks. The correlation between rig count and oil prices improves to 0.9775 when we model the 16 week lag.
So what happens next? Assuming the oil rig count will average 1,100 units through the rest of the year, the data suggests further pressure on oil prices in the short term.
We would expect oil prices to trade within a $65 - $75 dollar window through the rest of the year, further easing the pressure on UK manufacturing costs and inflation. This is a brave call with the levels of uncertainty in US foreign policy in the Middle west. Yet it is notable the markets did not react to the downing of a Syrian jet over Israeli airspace on Tuesday.
Forecasting oil prices is marginally easier than forecasting exchange rates. The forecasts should be considered with caution. I just wanted to share the US Oil Rig Data with you. We can never resist a great chart.
Our
forecasts for UK inflation remain unchanged. We expect UK inflation to
remain above target for the rest of the year, especially with the easing
of the public sector pay cap. We will be back with the Saturday Economist at the end of the week, as we review the latest GDP data for the UK ... Don't Miss That!
Have a great week,
John
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