Question: Is oil cheap compared to history? Answer: yes!

The blue line in the chart below shows the real price of WTI Crude (i.e. the inflation adjusted price) since 1973. The grey vertical bars show the 5 US recessions over this period.  Current inflation adjusted WTI crude prices are now approaching the lowest levels in the last 40 years.  In real terms, oil is very cheap.

Cheap oil can be a big benefit to the global economy, especially for countries that are net importers of oil.  But low oil can also be damaging - FNZ Capital report that 45 US listed shale oil companies are currently insolvent or in talks with creditors.  Moody's has also placed the ratings of 120 smaller oil and gas companies and 55 mining companies on review for credit downgrade.  There is talk of US$380 billion of oil capex having been delayed in the US which will hit future production.  Cheap oil is hurting oil producers.

Inflation adjusted price per barrel of WTI Crude since 1973 (source Deutsche Bank)

Inflation adjusted price per barrel of WTI Crude since 1973 (source Deutsche Bank)

Another interesting point is that in each of the 5 US recessions since 1973 the price of oil has fallen.  The good news here for US oil producers is that US growth is expected to exceed 2% this year - so the US economy is unlikely to drive oil lower (although it's possible other factors, such as continuing over-supply, could)

John Berry

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