BRENT CRUDE OIL 2014 – 2024, $/BBL
Most commodity traders rely on “technical analysis” these days. And one of their key charts is the “triangle” shape.
It monitors the balance of power between the bulls (seeking to push prices higher) and the bears (trying to take them lower).
As the chart shows, Brent oil prices are playing out in a triangle that began 4 years ago in 2020, after prices fell to $22/bbl at the start of the pandemic in April 2020:
- Central bank and policy stimulus then pushed prices back up to $123/bbl in March 2022.
- But this was unsustainable and they then fell back to $77/bbl in December 2022.
Since then, they have again formed a major “triangle shape”.
“TRIANGLES” ARE A RED FLAG FOR OIL MARKETS
CB – CRUDE OIL BRENT – DAILY CANDLESTICK CHART
As the chart shows, this parallels the triangle also seen in August 2014. Prices then collapsed from $106/bbl in August to $47/bbl in January. It also highlights the geopolitical parallel:
- OPEC+ output cuts since Q4 2022 have allowed US production to rise 9% to a record 13.2mbd
- And so OPEC are again nervous about their loss of market share to higher-cost US producers
And, of course, today’s higher prices are helping to accelerate the energy transition. If prices were lower, it might be harder to justify some renewable investments. But at today’s levels, the payback periods can be very attractive.
US RECESSIONS AND THE OIL PRICE
The other key issue, of course, is that higher oil prices generally lead to recessions, as the chart shows. The reason is simple.
People only have so much cash to spend. If they have to spend it on driving and heating/cooling their home, they can’t spend it on all the other things that drive the wider economy.
- Oil prices now represent 3% of global GDP, based on latest IMF data and 2024 forecasts
- This level has been linked with a US recession on almost every occasion since 1970
- The exceptions were post-2009 when China and the Western central banks ramped up stimulus
- This created a debt-financed bubble, but today’s rising interest rates mean the bubble is starting to burst
HURRICANE RISK MAY SUPPORT PRICES IN THE SHORT-TERM
“History repeats, but it doesn’t rhyme”, as US writer Mark Twain reminds us. And whilst it’s tempting to assume August 2024 will be the same as August 2014, Hurricane Beryl reminds us that life may not be that simple.
As noted here earlier this month, US weather agency NOAA is forecasting the number of Category 3+ hurricanes could double this year. That would take US Gulf oil rigs offline as their crews are evacuated.
And so in the short-term the weather may well play a role in supporting oil prices.
But beyond this, from a Scenario Planning perspective, former Saudi Oil Minister Sheikh Yamani’s warning in 2000 looks increasingly prophetic today:
“30 years from now, there will be a huge amount of oil – and no buyers. 30 years from now, there is no problem with oil. The Stone Age did not end because the world ran out of stones, and the Oil Age will not end because we run out of oil. I am a Saudi and I know we will have serious economic difficulties ahead of us.
“As King Faisal said in 1974, ‘In one generation we went from riding camels to riding Cadillacs. The way we are wasting money, I fear the next generation will be riding camels again’.“