Oil Markets in 2016: Back to the Future II?

 

Thirty years ago, the film 'Back to the Future II' made some amazingly accurate predictions about everyday technology, including video conferencing, biometrics and wearable tech. Around that same time, the US was also experiencing a major oil price collapse, which is an appropriate analogue for today's current market slowdown. But just as the movie didn't get it all right (self-lacing shoes, anyone?), we also cannot depend upon the 1986 oil market to tell the full story of 2016.  

It is always important to reflect on the lessons we learn from history. And while the crude oil price collapse of 1986 provides a solid framework for understanding the similar collapse we're experiencing today, there are also important differences.

Several circumstances of the 1986 collapse are virtually identical to the ones driving today's low-price market, including the percentage terms of the price drop and the climate of growing oil demand. Also as in 1986, today's market is seeing non-OPEC supply growth exceeding that increased demand. Further, OPEC's decision to compete for market share, largely influenced by Saudi Arabia, echoes its behaviour 30 years ago.

Comparing the crude oil price (as an index) in both time periods shows a similar trajectory for the oil market in the year immediately following the peak price.

Pre-crash balances

However, this is where the similarities diverge and two key differences emerge in the stories of 1986 and 2016.

The first is the current level of high stocks. In 1987, the year after the previous collapse, oil prices rose. By contrast, in 2016, prices are still declining, resulting in a weaker crude oil outlook than history would suggest.

Secondly, the role of US tight oil changes the recovery landscape. Despite a brief recovery in 1987, oil prices fell again. We expect a different result this time around, as the projected decline in non-OPEC supplies will surface by 2017 — more quickly than it did in the 1980s — largely due to the responsiveness of US tight oil.

Because of the US upstream sector's proactive nature along with significant demand growth from emerging economies, we expect a faster recovery from the current situation than we experienced 30 years ago.

Learn more
Our Insight report, 'Oil Markets in 2016: Back to the Future II?' offers detailed comparison of the contributing factors to the oil price collapses of 1986 and 2015. You may purchase it on demand via woodmac.com or as part of a subscription service.

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